1

FINANCIAL TERMS

1. Abnormal Loss : Abnormal loss is not inherent. It has no concern with the nature of
goods. Abnormal loss may arise due to theft, fire accident etc. Such losses should not
be allowed to effect the consignment accounts, or profits on consignment. The value
of closing stock is also effected in case of abnormal loss. Abnormal loss may occur
either in the godown of the consignee or in transit.

2. Acceptance : After a bill is drawn by the drawer, it has got to be accepted by the
drawee. Without such acceptance, a bill has got no value. Acceptance should be
given by the drawee across the face of the bill.

3. Accounting: Accounting concerned with the maintenance of accounts. It includes the

preparation of records and reports based on the recorded data. It also includes
interpretation of the reports. Accountancy helps the interested parties to know the
state of affairs of the business. According to R. N. Anthony, Accounting system is a
means of collecting, summarising, analysing and reporting in monetary terms, the
information about the business. Accounting is known as Language of Business.

4. Account Sales : A statement submitted by the consignee to the consignor giving

account of the sale proceeds, details of various expenses incurred and the
commission due to him.

5. Accounting Concepts: Accounting concepts are the assumptions upon which the
accounting is based. They are also known as ‘Generally Accepted Accounting
Principles’. The accounting concepts include (I) money measurement concept; (ii)
business entity concept; (iii) Cost concept; (iv) going concern concept; (v) dual aspect
concept; (vi) matching concept; (vii) accounting period concept.

6. Accounting Conventions: Conventions mean customs or traditions which are useful

as a guide to the preparation and presentation of accounts. This include: (a)
Convention of conservatism; (b) Convention of materiality; (c) Convention of
consistency; (d) Convention disclosure.

7. Account Current : An Account Current is a statement of mutual transactions

between two parties for a given period of time. It includes interest payable to or
 2

receivable from the other party at an agreed rate. It takes the form of an account with
some additional columns for due date, number of days, interest, product, etc. In fact,
it is a copy of the ledger.

8. Accounting cycle: An Accounting Cycle is a complete sequence beginning with the

recording of the transactions and ending with the preparation of final accounts. It
includes journalizing, posting and balancing the ledger, preparation of trial balance
and finally the preparation of financial statements.

9. Accounting Equation: American Accountants have derived the rules of debit and
credit through accounting equation which is given below:
Assets = Equities or outside liability + Owners equity.
The equation is based on the principle that accounting deals with property
and rights to property and the sum of the properties owned is equal to the sum of
rights to the properties. The properties owned by a business are called assets and
the rights to properties are known as liabilities of the business. The accounting
equation is:
Assets = Liabilities + Capital.

10. Accounting Period: A period of twelve months for which accounts are usually kept.
It may be calendar year or financial year. In case of new business, certain times,
accounting period may be less than twelve months.

11. Accounting Standards: Accounting standard are the policy documents. They will be
issued by recognised Accounting Bodies. They relate to various aspects of
measurement, treatment and disclose of accounting transactions. The purpose of
measurement, treatment and disclose of accounting transactions. The purpose of
these standards is to standardise the information relating to financial statements.

12. Accounting Standard Committee: The international Accounts Standards

Committee (IASC) was established on 29th June 1973. The IASC so far issued 39
International Accounting Standards (IAS). In India, the Accounting Standards
International Accounting Standards (IAS). In India, the Account Standards Board
(ASB) was constituted by Institute of Charted Accountants of India (ICAI) on April 21,
1977. So far this Board issued 15 accounting standards.
 3

13. Adjusting Entries: Sometimes it becomes necessary to make entries for

adjustments at the end of the year. Prepaid expenses, outstanding expenses,
depreciation etc., will be shown by way of adjustment entries in the journal proper.

14. Air Consignment Note : It refers to a document prepared by the consignor which is
handed over to the carrier of goods, while transporting goods through airways.

15. Amortisation : The terms ‘amortisation’ refers to writing off the proportionate value of
the intangible assets such as copyrights, patents, goodwill etc.

16. Analytical Petty Cash Book: In business, the petty payments are numerous. They
are entered in a petty cash book in a columnar form. There will be a separate column
for each head of petty expense and a column for the total. Every petty payment is
entered in both these columns. Thus, provision is made in the petty cash book to
show the details of the payments. Such a book showing an analysis of the payments
is called Analytical or Columnar petty cash book.

17. Annuity : Annual payment of the claim of a retiring or deceased partner.

18. Assets: The valuable things owned by the business are known as assets. These are
the properties owned by the business. The assets are classified into four types. They
are: (I) Fixed assets (land and Buildings, Plant , machinery etc.) (ii) Current assets
(Cash, stock, debtors etc) (iii) Fictitious assets (preliminary expenses) (iv) Intangible
assets (goodwill, patents etc.)

19. Assocham : It is a federation of Chamber of Commerce. It is located at Mumbai.

20. Assurance : The term ‘Assurance’ is applied to contracts, where the risk insured
against is certain to happen; but the time of its happening is uncertain. Technically
speaking a life insurance should be called ‘Life Assurance’.

21. Average Days : The number of days arrived at by dividing the total of the products by
the total amounts payable.

22. Average Due Date : It is the date on which a single payment may be made in one
single amount in the place of several amounts due on different dates, without loss of
interest to either party (debtor or creditor)/
 4

Average Due date = Starting Date  Total Products / Total Amount

23. Bad debts: Sometimes, a debtor may not be able to pay the debt, partially or
completely. The debts that cannot be recovered from the debtors are called bad
debts. They are treated as a loss to the firm.

24. Balance Method: Under this method all balances of each account will be shown
against the debit or credit side in the Trial Balance. If an account has no balance then
it will not be shown in the trial balance. This method is more convenient and
commonly used.

25. Balance Sheet: Balance sheet is a statement which shows the financial position of a
business on a particular date. The left side of the balance sheet is called liabilities
side. The right side is called assets side. The total liabilities side and the total of
assets side of the balance sheet should be the same.

26. Balance of Payments : A measure of all money flows in and out of a nation.

27. Balance of Trade : A measure of a nation’s exports and imports.

28. Base Date : It is the starting date taken for the calculation of average due date. It is
also called starting date, zero date or focal date.

29. Bank : A bank is an institution accepting money for the purpose of lending or
investment in deposit money from public, is repayable on demand or otherwise,
withdrawal by cheque, drafts, order or otherwise.

30. Bank Money : Bank Deposits against which cheques can be issued.

31. Bank Reconciliation Statement: Bank Reconciliation statement can be defined as a

statement which reconciles the balances as per cash book and the balance as per
pass book showing the causes of difference between the two. It is prepared with a
view to find out the causes responsible for the difference between the balances of
cash book and pass book and to reconcile the balance.

32. Barter : Exchange of goods for goods or services without the use of money.
 5

33. Barratry : It refers to a fraudulent breach of duty on the part of master of the ship or
the mariners, to the injury of the owner of the ship or the cargo.

34. Bill Dishonour : When the acceptor fails to honour the bill, when it is presented for
payment on the due date, it means the bill is dishonoured. Simply to say dishonour of
the bill means the non-payment of the bill.

35. Bills Payable Book: When the trader purchases goods from others, he will accept
the bills and return them to the drawer. All such bills accepted by the trader are
known as bills payable. Bills payable book is used to record all the bills or promissory
notes accepted.

36. Bills of Exchange : An instrument in writing containing an unconditional order,

signed by the maker directing a certain person to pay a certain sum of money on
demand or after a specified period to a certain person or his order.

37. Bill of Lading : A receipt for goods, signed by the master or agent of a ship,
acknowledging their receipt on board and undertaking their delivery to the consignee
under specified conditions.

38. Bills Receivable : A bill of exchange or a promissory note receivable by the

business.

39. Bonded warehouse : These are warehouses licenced by the Government. They
accept imported goods for storage before the payment of customs duty.

40. Book – Keeping: Book – keeping involves the chronological recording of financial
transactions in a set of books in a systematic manner. The object of book – keeping is
to prepare original books of Accounts. It is restricted to journal, subsidiary books and
ledger accounts only. Accountancy begins where book – keeping ends.

41. Capital: It is that part of wealth which is used for further production. Thus, capital
consists of all current assets and fixed assets. Cash in hand, cash at Bank, buildings,
Plant and furniture etc., are the capital of the business. Capital is classified as fixed
capital and working capital.
 6

42. Capital Receipts: Capital receipts are those receipts which are received on selling of
capital assets. For example, sale proceeds of fixed assets or amount raised through
loans, issue of shares. All capital receipts are to be shown at the liabilities side of the
balance sheet.

43. Capital Expenditure: Amount spent on acquiring of capital assets is termed as

capital expenditure. For example, amount spent on buying of plant and machinery. All
items relating to capital expenditure are to be shown at the assets side of the balance
sheet only.

44. Capital Fund : The excess of assets over liabilities of trading concerns is termed as
Capital Fund or General Fund. It includes other incomes like life membership fees,
entrance fees etc.

45. Card Index : A method of filing used to facilitate reference to any particular record.
Also called visible card index.

46. Card Punch : A device which punches holes or perforates cards upon instruction
from a computer.

47. Cash discount: Cash discount is an incentive given to debtors for making prompt
payment of the amount due from them. Similarly, cash discount may also be received
by the trader while making an early payment to the creditors. It is not deducted from
the selling price of the goods because allowing of discount is not certain. Cash
discount will be recorded in the books of accounts as an income when it is received
and as an expense when it is allowed to the creditors.

48. Cash Book: Cash book is a principal book as well as the subsidiary book. It is a book
of original entry as the transactions are recorded for the first time from the original
documents. It is a ledger in a sense that it is designed in the form of cash account. It
records each receipts on the debit side and cash payments on the credit side. Thus,
the cash book fulfils the functions of both Ledger and Journal.

49. Cash Memo: Cash Memo is issued on cash sale. Cash memo Book is printed. It
contains cash memos in duplicate. The original copy of the Cash Memo is given to
the customer who pays cash on account of cash sales. The carbon copy is used as
an office copy of Cash Memos.
 7

50. Causa Proxima : It means nearest cause and not the remote one to be taken notice
of, while determining the liability of the insurers.

51. Central Bank : It is the apex bank. It acts as a banker to Government, banker to
banks. It frames various policies affecting the monetary policy of the economy.
Reserve Bank of India is the Central Bank of our country.

52. Chamber of Commerce : It is a voluntary non-trading association of people engaged

in Commerce and Industry.

53. Charter Party : An agreement relating to the hire of a ship or a part of it.

54. Chronological Filing : A filing system under which documents are filed according to
date.

55. C.I.F. : It means cost, insurance and freight. Under a C.I.F. quotation the seller must
ship the goods meeting all charged upto on board and pay freight and insurance of
goods also.

56. Clerical Errors : These errors arise because of mistakes committed in the ordinary
course of the accounting work. The clerical errors are of three types. They are : (a)
Errors of omission (b) Errors of commission (c) Compensating errors.

57. Closing Entries: At the end of the year the balance of nominal accounts are
transferred to trading account or profit and loss account.

58. Closing Stock: It is the value of the unsold goods at the end of the trading period.
Closing stock is valued at the cost price or the market price, which ever is lower. It
should be noted that the closing stock of the current year, will be the opening stock
for the next year.

59. Commercial Bank : A Commercial bank is one which accepts demand deposits and
allows withdrawal of money through cheques etc., Ex : SBI, Andhra Bank.

60. Common Carrier (Public carrier) : Transportation agencies that offer services to the
general public.
 8

61. Compensating Errors : A group of errors wherein the effect of one error is counter
balanced (compensated) by the effect of the other errors. Such errors do not effect
the agreement of trial balance.

62. Compound entry: Some times two or more transactions of the same nature may
take place on the same date. Instead of making a separate entry for each of
recording a number of transactions is termed as Compound Journal Entry. In case of
compound entry the total of all debits should be equal to the total of all credits.

63. Computer : An electronic machine used to process data quickly.

64. Consignment : Goods sent by a producer or a trader to his agents for sale on their
behalf and at their risk. The process of sending goods on this basis by one firm to
another to sale is known as consignment. There are two parties in consignment. Viz.,
Consignor and Consignee.

65. Consignment Note : Form to be filled in while sending goods through passenger
train.

66. Consignor : A person who sends the goods to his agent on consignment basis. The
relationship between the consignor and consignee is that of a Principal and an Agent.
The consignor prepares consignment account and consignee account.

67. Consignee : A person to whom the goods are sent on consignment basis. For selling
the goods the on consignment, the consignee gets commission. He finalize the
account of the consignment by sending the account sales along with the money due
to the consignor.

68. Contingent Liabilities: These are not the real liabilities. Future events can only
decide whether it is really a liability or not. Due to their uncertainty, these liabilities are
termed as contingent (doubtful) liabilities. Ex: Dispute in a Court relating to the
payment of taxes.

69. Containership : It is specially constructed for the transport of Cargo in Containers.

 9

70. Contra Entry: The transactions relating to cash and bank balances are to be
recorded in the cash book at the same time and hence contra entries are necessary.
In Latin contra means the other side. Contra entry means the recording of debit and
credit of a transaction at a time in the cash book. Contra entry is necessary when
cash is deposited in the bank; cheque received is not sent to bank for deposit on the
same day; and when cash is withdrawn for office purpose.

71. Contract of Affreightment : It is a contract whereby the ship-owner agrees to carry

the goods in return for a sum of money. It may be contain in a document called Bill of
lading or Charter party.

72. Co-operative Banks : These are formed on the principle of co-operating to extend
credit facilities to farmers, public etc.

73. Cost Concept: Usually all the transactions will be recorded at cost in the books.
However, at the end of every year the Accountant shows the reduced value of the
asset, after providing for depreciation. This approach is preferred because it is difficult
and time consuming to ascertain the market values. Further, it becomes very difficult
to know the market values as they change from time to time.

74. Cost of Goods sold: It is the total of opening stock, purchases and direct expenses
and subtraction of the closing stock from the total.

75. Creditor: A creditor is a person to whom something is owed by the business. He is a

person to whom some amount is payable for loan taken, services obtained or goods
bought.

76. Credit Note: While returning the goods, the customers will send the debit note along
with the goods. When the trader receives goods so returned he verifies the goods
with the debit note. After satisfying himself the customers account will be credited.
Then a letter containing this information is sent to the customer. It is called credit
note. The credit note is just like debit note. For identification sake credit note and
debit note will be printed in different colours.

77. Current Liabilities: Liabilities payable within a year are termed as current liabilities.
The value of these liabilities goes on changing. Creditors, bills payable and
outstanding expenses etc. are current liabilities.
 10

78. Customs Duty : It is one type of tax imposed by Central Government on certain
commodities that are improrted.

79. Date of Maturity : The date on which bill is due for payment.

80. Days of Grace : While calculating due date of the bill, three days of grace have to be
compulsorily added. Initially 3 days of grace were allowed to the drawee as a matter
of sympathy and kindess but it became a practice. It has now become a law.
According to Indian Negotiable Instrument Act, the drawee can avail of 3 days of
grace as a matter of legal right. However, days of grace are not allowed to bills
payable at sight.

81. Debit Note: When goods are received from the supplier, suppliers account is
credited. When the goods are returned, the suppliers account is debited. So in the
case of purchase returns a debit note is prepared. It should contain the details of
goods returned. Generally, the debit note will be made in duplicate. One will be sent
to the supplier, and other will be kept as an office copy.

82. Debtor: Debtor means a person who owes money to the trader.

83. Deferred Revenue Expenditure: An expenditure that is normally heavy and its
benefit is likely to be available for more than one year is referred to as deferred
revenue expenditure. For example, expenditure incurred on advertisement, cost of
shifting the plant and Machinery to a new site.

84. Del Credere Commission : commission paid by the consignor to the consignee for
bearing the risk of bad debts arising out of credit sales made by him on behalf of the
consignor. Generally the Del credere commission is to be calculated on the total
sales. Unless, otherwise mentioned that it is to be calculated on credit sales only.

85. Demurage : Penalty paid by the receiver of goods to the railways or Transportation
agencies in case of delay in clearing goods from their godowns.

86. Depreciation: The permanent and continuous diminution in the quality, quantity or
value of an asset. Generally, depreciation is applicable only for fixed asset.
Depreciation is caused by use, passage of time or obsolescence. There are several
 11

methods available for calculating depreciation. They include (1) Straight Line Method
(2) Written down Value Method etc.

87. Development Banks : They provide long-term funds to the industries. They also
provide promotional services. Ex : IDBI, IFC, ICICI, APSFC.

88. Depletion : The term ‘depletion’ is used in respect of the extraction of natural
resources from wasting assets such as quarries, mines etc. It refers to the reduction
in the available quantity of he material. It is a method of computing the depreciation
on wasting assets.

89. Dictaphone : A device which can record spoken words over the intercom for later
transcription by audit typists.

90. Dictating Machine : A machine used to dictate letters.

91. Diminishing Balance Method : It is also known as Reducing Balance Method or

Written Down Value method. Under this method, the amount of depreciation is a fixed
percentage calculated on reducing value of the asset. The amount of depreciation
goes on decreasing every year.

92. Direct Expenses: Direct expenses are the expenses incurred in purchasing or
manufacturing goods. They include: carriage, freight duties, wages, factory lighting
and insurance etc.

93. Discount: Discount in cash book means cash discount only. In double column and
triple column cash book there will be a column for discount in the debit and credit
sides of cash book. Discount allowed will be shown in the debit side and discount
received will be shown in the credit side of the cash book. Finally, the discount will be
shown in the credit side of the cash book. Finally, the discount received and discount
allowed are totalled separately.

94. Discounting of Bill : Encashment of bill with the bank before due date.

95. Donations : Donation is the charity given by an individual or an institution for a non-
profit organization. Donations can be of two types. They are : (1) General Donations
and (2) Specific Donations. General Donation is to be treated as revenue income and
 12

is to be credited to Income and Expenditure account. If the amount is substantial is to

be taken to the liabilities side of the balance sheet as capital receipt. Specific
donations are treated as capital receipts. Hence, they are to be shown on the
liabilities side of the Balance Sheet.

96. Double Column Cash Book: This book has two amount columns on each side, one
for discount and the other for cash. Discount column on debit side represents loss
being discount allowed to customers. Similarly discount column on credit side
represents gain being discount received. Two column cash book may also be
maintained with discount and bank columns only.

97. Double Entry System: Double entry system is a scientific way of presenting
accounts. As such all the business concerns feel it convenient to prepare the
accounts under double entry system. Under dual aspect concept, the Accountant
deals with the two aspects of business transactions i.e., (I) receiving aspect and (ii)
giving aspect. Receiving aspect is known as ‘Debit aspect’ and giving aspect is
known is ‘Credit aspect’. In double entry book-keeping system these two aspects are
recorded facilitating the preparation of trial balance and the final accounts therefrom.

98. Double Insurance : It is an insurance wherein the same risk is insured by two or
more companies.

99. Drawer : One who draws the bill, usually a creditor.

100. Drawee : A person on whom the bill is drawn, usually a debtor.

101. Drawings: Cash or goods withdrawn by the proprietor from business for his personal
or household use is termed as ‘drawings’.

102. Dual Aspect Concept: This concept throws light on the point that each transaction
has two fold affect – the receiving of the benefit and giving of the benefit. The
receiving aspect is termed as debit, where as the giving aspect as credit. Therefore,
for every debit, there will be corresponding credit. There is a famous dictum that
every receiver is also a giver and every giver is also a receiver. The dual aspect
concept also leads to the following accounting equation.
Capital + Outside Liabilities = Assets
 13

103. Due Date : The due date of a bill of exchange is the date when the amount of the bill
is payable by the drawee. It is also called the maturity date. The date of maturity will
be determined according to the tenure of the bill adding three days of grace.
104. Duplicator : A machine used to reproduce multiple copies of documents.

105. Duty Drawback : Sometimes, goods which are imported into a country are
reexported. In this case, the import duty, already charged, is refunded. This is known
as customs draw-back.

106. Earned premium : The portion of an insurance premium for which protection has
already been provided by the insurer.

107. Earnest Money : A deposit made towards the purchase of real property. In some
locales it is viewed synonymously with the Binder. Other places consider it as an
additional deposit towards the purchase. Here, the amount can be quite large. Often it
would accompany a signed sales contract prior to the closing or settlement.

108. Earnings : The amount of profit a company realizes after all costs, expensed and
taxes have been paid. It is calculated by subtracting business, depreciation, interest
and tax costs from revenues. Earnings are the supreme measure of value as far as
the market is concerned. The market rewards both fast earnings growth and stable
earnings growth. Earnings are also called profit or net income.

109. Earnings per share : A widely used indicator of the return on equity investments.
Any figure quoted represents the total amount of a company’s earnings (after
deductions) divided by the number of ordinary shares it has issued.

110. Earnings yield : A company’s per-share earnings expressed as a percentage of its

stock price. This provides a yardstick for comparing stocks with bonds, as well as with
other stocks.

111. EBIT : Earnings before interest and taxes. EBIT is calculated by subtracting costs of
sales and operating expenses from revenues. The figures are often used to gauge
the financial performance of companies with high levels of debt and interest
expenses.
 14

112. Economic indicators : Key statistics used to analyze business conditions and make
forecasts. Among them are the unemployment rate, inflation rate, factory utilization
rate and balance of trade.

113. Economic Life : The time period over which an asset’s NPV is maximized. Economic
life can be less than absolute physical life for reasons of technological obsolescence,
physical life for reasons of technological obsolescence, physical deterioration, or
product life cycle.

114. Economic Order Quantity (EOQ) : The order quantity that minimizes total inventory
costs. A total inventory cost is the sum of ordering, carrying and stock-out costs.

115. Economic risk : In project financing, the risk that the project’s output will not be
salable at a price that will cover the project’s operating and maintenance costs and its
debt service requirements.

116. Electrostat : A machine, which produces exact copies of original documents.

117. Effective income tax rate : The income tax provision shown on an income statement
divided by pretax income. This differs from the statutory rate because of deductions,
credits, and exclusions.

118. Effective interest rate : The cost of credit on a yearly basis expressed as a
percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually
a higher amount than the interest rate stipulated in the note.

119. Effective Margin (EM) : Used with SAT performance measures, the amount equal to
the net earned spread, or margin of income, on assets in excess of financing costs for
a given interest rate and prepayment rate scenario.

120. Efficient capital market : A market which new information is very quickly reflected
accurately in share prices.

121. Efficient market : Economy in which prices correctly reflect all relevant information.
 15

122. Elliott wave theory : Technical market timing strategy that predicts price movements
on the basis of historical price wave patterns and their underlying psychological
motives. Robert Prechter is a famous Elliott Wave theorist.

123. Electronic trading : The process whereby customers or their representatives can
directly enter orders and receive reports and statement via the internet. It can also
include trading with terminals over dedicated telephone lines.

124. Embedded option : An option whose characteristics are implied but not explicitly
specified. One notable example is the option granted a mortgagor (home owner) by
the lender. The mortgagor has the right to prepay the mortgage at any time but is not
required to do so in any specified manner.

125. Emerging markets : A term which broadly categorizes countries in the midst of
developing their financial markets and economic infrastructures. This development is
viewed in terms of freer, more liquid markets, which facilitate trade. Privatization of
former state owned or administered businesses is a key factor in this process.

126. Endorsement : The term ‘endorsement is derived from the Latin word endorsum’,
which means on the back. It means putting one’s signature on the back of a bill to
transfer it to another.

127. Endorser : A person who transfers a bills receivable to his own creditor in full or part
payment of his debt.

128. Endorsee : A person in whose favour the bills receivable is transferred.

129. Endowment : A life assurance policy related to a mortgage designed to pay off the
amount originally borrowed at the end of the mortgage term. An endowment policy
will pay you a fixed amount on a set date or if you die before that date, in other words
it’s both a way of saving and life insurance. People often use endowments to repay
interest only mortgages. The drawback of them is that it is often unclear how much
you are having to pay in charges and the plans are often very rigid, so if you start an
endowment and then decide to cancel it, you might not get back what you paid in.

130. Entrance Fee’s: The fees collected at the time of admission for a member into the
organization is known as Entrance fees. The Entrance fee’s is to be posted in the
 16

debit side of the Receipt and Payments Account. Entrance fees may be treated as
capital income or revenue income. Sometimes, a part of it may be treated as capital
income.

131. Entrepot Trade: When a trader purchase goods from one country and sells the same
goods to another country; it is called entrepot trade.

132. Equities: Another word for stocks and shares.

133. Equity: Ownership interest possessed by shareholders in a corporation – stocks as

opposed to bonds. It is the part of a company’s net worth that belongs to
shareholders.

134. Equity capital: A form of financing where equity in a business is sold to private
investors.

135. Equity hedge funds: Try to long position themselves in stronger or outperform
issues while selling short weaker or poorer prospect securities. Variations of this are
trading large cap issues versus small caps; using derivatives for enhanced returns
specializing in program trading; or using leverage to magnify returns.

136. Franco or Rendu Price: It means that all the charges paid by the exporter up to and
including delivery to the buyer’s warehouses.

137. Error: A mistake in terms of quantity, type of order, side of market (purchase or sale),
security, or other condition of a trade.

138. Errors of Commission: When a transaction is incorrectly recorded in the books of

account, it is called error of commission. Examples of such errors include errors on
account of wrong balancing of an account, wrong posting, wrong carrying forwards,
wrong totaling etc. errors of commission affect the agreement of Trial Balance.

139. Errors disclosed by trial balance: There are a number of errors, which if
committed, will lead to the disagreement of trial balance. These include: wrong
totaling or wrong casting of the subsidiary books, posting of the wrong amount,
posting an amount on the wrong side of the accounts, omission of an account from
 17

ledger accounts, omission of an amount from the trial balance, carry forward errors,
error in balancing the amount.

140. Errors not disclosed by Trial Balance: The trial balance will agree even if these
errors are there in the accounts. These errors are: errors of omission, errors of
commission, compensatory errors and errors of principle.

141. Errors of Omission : When a transaction is wholly or partially omitted to be recorded

in the subsidiary books, it is called an error of omission. Complete omission involves
the non-recording of any transaction in the original books of accounts. Partial
omission is done when a transaction is recorded in the primary book but not posted to
the ledger.

142. Error of Principle : Errors involving violation of accounting principle are termed as
Errors of Principle. For example, treating capital expenditure as revenue expenditure
or vice versa.

143. Escalation : Refers to the increase in benefit (usually annual) payable during the
payment term of an insurance claim that is not settled via a lump sum payment. For
example, claims under an Income Protection Policy might escalate annually in line
with the Retail Price Index.

144. Escalator Clause : A clause in a contract providing for increases in costs such as
labor expense and materials.

145. Escheat : The reversion of property to the state (government) in the absence of legal
heirs or claimants.

146. Escrow : (1) A procedure whereby a disinterested third party handles legal
documents and funds on behalf of a seller and buyer. (2) Money that is kept by the
mortgage company to ensure that taxes can be paid in full when due.

147. Estate : Strictly, an interest in land, but generally used to mean the total (land,
chattels, investments, etc) owned by an individual.

148. Estate taxes : Taxes levied by the federal and state governments on the transfer of
your assets after you die.
 18

149. Euro : The European Single Currency.

150. Eurobonds : Bonds issued and traded outside the country whose currency they are
denominated in, and outside the regulations of a single country; usually bonds issued
by a non-European company for sale in Europe. Also called global bonds.

151. Eurocurrency : A deposit in a bank outside the depositor’s country of origin. Most
deposits are U.S. dollar deposits, although nearly all major Western currencies are
represented.

152. Eurodollars : U.S currency held in banks outside the United States, mainly in
Europe, and commonly used for settling international transactions. Some securities
are issued in Eurodollars – that is, with a promise to pay interest in dollars deposited
in foreign bank accounts.

153. Euromarkets : A general term for the Eurobond and Euroloan markets.

154. European Union (EU): An economic association of European countries founded by

the Treaty of Rome in 1957as a common market for six nations. It was known as the
European Community before 1993 and is currently comprised of 15 European
countries. Its goals are a single market for goods and services without any economic
barriers and a common currency with one monetary authority.

155. EX : Derived from Latin and refers to “Without” or “not included”.

156. Exchange Banks : An exchange bank is mainly concerned with buying and selling of
foreign exchange. They also provide finance to the import and export trade.

157. Ex gratia payment : Latin for “from favour”. A payment by an insurer to an insured
for which here is no liability under the contract.

158. Exchange : A centralized place for trading securities and commodities, usually
involving an auction process. Examples include the New York Stock Exchange
(NYSE) and the American Stock Exchange (AMEX).
 19

159. Exchange Fund: Investment vehicle introduced in 1999 that appeals to wealthy
investors with large holdings in a single stock who want to diversity without paying
capital gains taxes. These funds allow investors to exchange their stock for shares in
the diversified portfolio of stocks in a tax-free transaction.

160. Exchange Rate: The price of one country’s currency expressed in another country’s
currency.

161. Exchange Rate Mechanism (ERM) : The methodology by which members of the
EMS maintain their currency exchange rates within an agreed-upon range with
respect to other member countries.

162. Exchange rate risk: Also called currency risk; the risk that an investment’s value will
change because of currency exchange rates.

163. Exchange ratio: The number of new shares in an acquiring firm that are timed for
each outstanding share of an acquired firm.

164. Excise Duty: It is the tax by a Government on goods produced and consumed within
the country.

165. Exchange risk: The variability of a firm’s value that results from unexpected
exchange rate changes, or the extent to which the present value of a firm is expected
to change as a result of a given currency’s appreciation or depreciation.

166. EX-dividend: A period of time immediately before a dividend is paid, during which
new investors in the stock are not entitled to receive the dividend. A stock’s price is
revised lower to reflect the dividend value on the first day of this period. On that day,
a stock is said to “go ex-dividend”. Usually indicated in newspapers with an x next to
the stock’s or mutual funds’ name.

167. Ex-dividend Date: Date on which the value of the income or capital gains distribution
is deducted from the price of a fund’s shares.

168. Ex-factory: Where a seller’s responsibility ends when the buyer at point of origin.
This can also be written as ex-warehouse, ex-works, etc.
 20

169. Exhaust price: The low price at which a broker must liquidate a client’s holding in a
stock purchased in a margin account in order to meet a margin call when the client
cannot meet the call.

170. Expectations theory of forward exchange rates: A theory of foreign exchange

rates that states that the expected future spot foreign exchange rate t-periods from
now equals the current t-period forward exchange rate.

171. Expected volatility: The forward looking aspect of volatility or variability.

172. Expense: Goods or services purchased directly for the running of the business. This
does not include goods bought for re-sale or any items of a capital nature.

173. Expense Ratio: The percentage of mutual fund assets deducted each year for
expenses, which include management fees, operating costs, administrative fees, 12b-
1 fees and all other costs incurred by the fund. Recently, the average expense ratio
for domestic equity funds was 1.4%. for fixed-income funds it was 1.1%. International
funds have higher expense ratios, averaging around 1.9%. There is no reason to buy
funds with expenses ratios higher than that. Sometimes the fund’s management may
elect to waive part of the expenses charged to shareholders in order to boost returns.
But this is usually a temporary waiver, so be careful because such funds often raise
their expenses once the waiver period ends.

174. Exposure netting : Offsetting exposures in one currency with exposures in the same
or another currency, when exchange rates are expected to move in such a way that
losses or gains on the first exposed position should be offset by gains or losses on
the second currency exposure.

175. Export Houses: Purchase goods locally and export them to foreign countries on their
account and risk instructing their branch offices or agents to whom they consign the
goods to sell on their behalf.

176. Export Trade: When a trader of one country sells goods to the traders of other
countries, this trade is called Export Trade.
 21

177. Ex-rights: Refers to a transaction which the new purchaser of a stock is not entitled
to participate in the recently declared rights offering. The mechanics are similar to ex-
dividend conditions. Here, the exclusion point in time is known as the ex-rights date.

178. Ex-stock dividends: The time period between the announcement of a stock dividend
and its actual payment. The buyer of shares during this time period does is not
entitled to the dividend.

179. Extension risk: For mortgage –backed securities, the risk that rising interest rates
may slow down mortgage repayment. Because investors’ money is tied up in the
securities, they may miss the opportunity to earn a higher rate of interest on a
different investment.

180. Extrinsic value: The time value component of an option premium.

181. External Market: Also referred to as the international market, the offshore market, or,
more popularly, the Euromarket. A mechanism for trading securities that at insurance
(1)are offered simultaneously to investors in a number of countries and (2) are issued
outside the jurisdiction of any single country.

182. F.O.B: It is one of the most commons export terms meaning free on board. Under a
F.O.B. quotation the exporter will deliver the goods free on board a ship as per
contract.

183. F.O.R: It means free on rail. The price quoted includes cost of goods plus packing
charges plus the cost of carrying goods to a railway station and loading them into
wagons.

184. Face value: Just like it sounds: The value a bond has printed on its face, usually
$1,000. Also known as par value, it represents the amount of principal owed at
maturity. The bond’s actual market value may be higher or lower. When a bond’s
market price fluctuates, it has an impact on its yield. If the price drops below the
bond’s face value, its yield goes up. If the price rises above face value, the yield goes
down.

185. Factors: Companies that buy accounts receivable, which are debts for merchandise
or services bought on credit. Factors assume the job of collecting the money due.
 22

186. Facultative reinsurance: A type of reinsurance in which the reinsurer can accept or
reject any risk presented by an insurance company seeking reinsurance.

187. Fair value: Viewed as the indifference point from a modeling perspective as to
whether to buy or sell an instrument or market. If the market price were higher than
fair value it would suggest selling the security. If the security was trading at less than
fair value it would suggest buying it. When coupled with related derivative
instruments, the approach becomes an arbitrage one.

188. Far month: Used in the context of option or futures to refer to the trading month of
the contract that is farthest away. Antithesis of nearest month.

189. FASB: The Financial Accounting Standards Board. The Private organization
responsible for establishing the standards for financial accounting and reporting in the
United States.

190. Favourable Balance: Favourable balance as per cash book means debit balance.
On the other hand, favourable balance as per pass book means credit balance.

191. Fax: Fascimile transmission or communication.

192. Fiat Money: Money that people have to accept as it has legal backing.

193. FICCI: It is a Federation of Indian Industrialists. The office of the organization is

located at Delhi. (Federation of Indian Chamber of Commerce and Industries)

194. Fictitious assets: Those assets which do not have any physical form are called as
fictitious assets. They do not have any real value. The examples are: Preliminary
expenses, goodwill etc.

195. FII: It is a Federation of Indian Industrialists. The office is located at Delhi.

196. Filing: The process of classifying, arranging and sorting out records for future use.

197. Fill or Kill order (FOK): A trading order that is canceled unless executed within a
designated time period. A market or limited price order that is to be executed in its
 23

entirety as son as it is represented in the trading crowed, and, if not so executed, is to

be treated as canceled. For purposes of this definition, a stop is considered an
execution. Equivalent to AON and IOC simultaneously.

198. Final Accounts: Final accounts are primarily prepared for ascertaining the
operational result and the financial position of the business. They consist of
(1) Trading and Profit and Loss a/c (2) Balance Sheets

199. Finance: 1. management of (esp. public) money. 2 monetary supports for an

enterprise. 3. Money resources of a State, company, or person.

200. Finance Charge: The total cost borne by a borrower to obtain credit. It includes
interest, points, and fees.

201. Finance company: Company providing money, esp. for hire purchase transactions.

202. Financial accounting: The area of accounting concerned with reporting financial
information to interested external parties.

203. Financial Accounting Standards Board (FASB): The Financial Accounting

Standards Board is an independent board responsible for establishing and
interpreting generally accepted accounting principles (or GAAP). U.S. companies that
adhere to GAAP are said to be more transparent and easier to analyze financially
than companies in many foreign countries. In fact, the differences in accounting
standards make it difficult to compare the earnings of companies in different
countries.

204. Financial adviser: A professional offering financial advice to clients for a fee and / or
commission.

205. Financial Analysis: Also called securities analysts and investment analysts.
Professional who analyzes financial statements, interview corporate executives, and
attend trade shows, in order to write reports recommending either purchasing, selling,
or holding various stocks.

206. Financial Control: The management of a firm’s costs and expenses in relation to
budgeted amounts.
 24

207. Financial distress: Events proceeding and including bankruptcy, such as violation of
loan contracts.

208. Financial Planning: Evaluating the investing and financing options available to a
firm. Planning includes attempting to make optimal decisions, projecting the
consequences of these decisions for the firm in the form of a financial plan, and then
comparing future performance against that plan.

209. Financial Policy: Criteria describing a corporation’s choices regarding its debt/
equity mix, currencies of denomination, maturity structure, method of financing
investment projects, and hedging decisions with a goal of maximizing the value of the
firm to some set of stockholders.

210. Financial Ratio: The result of dividing one financial statement item by another.
Ratios help analysts interpret financial statements by focusing on specific
relationships.

211. Financial Reporting Release (FRR): The policy releases and pronouncements from
the SEC (Securities and Exchange Commission).

212. Financial results: Usually refers to the summary financial statements provided in
compliance to the gap guidelines. They can cover any periods, but usually cover
single month, quarter, or annual periods.

213. Financial risk: The risk that the cash flow of an issuer will not be adequate to meet
its financial obligations. Also referred to as the additional risk that a firm’s stockholder
bears when the firm uses debt and equity.

214. Financial statements: Summary of accounting information such as Profit and Loss
Account and Balance Sheet prepared at the end of an accounting period. These are
also called Final Accounts.

215. Financial strategy: Practices a firm adopts to pursue its financial objectives.

216. Financial structure: The way in which a company’s assets are financed, such as
short-term borrowings, long-term debt, and ownership equity. Financial structure
 25

differs from capital structure in that capital structure accounts for long-term debt and
equity only.

217. Financial tables : Tables found in newspapers listing prices, dividends, yields, price-
earnings ratios, trading volume, and other important data on stocks, bonds, mutual
funds, and futures contracts.

218. Firewall: The legal barrier between banking and broker / dealer operations within a
financial institution created to prevent the exchange of inside information.

219. First call: With Collateralized Mortgage Obligation (CMOs), the start of the cash flow
cycle for the cash flow window.

220. First mortgage: A type of mortgage that through a lien gives precedence to the
lender of the first mortgage over all other lenders in case of default.

221. Financial year: 1. any year connected with finance, such as a company’s accounting
period or a year for which budgets are made up. 2. A specific period relating to
corporation tax, i.e. the year beginning 1st April. Corporation-tax rates are fixed for
specific financial years by the Chancellor in his budget; if a company’s accounting
period falls into two financial years the profits have to be apportioned to the relevant
financial years to find the rates of tax applicable.

222. First –in-First out (FIFO): Basis for calculating the tax impact of mutual fund profits
and losses that assumes shares sold are the oldest shares owned.

223. First-in First-out: The accounting technique whereby the first items in inventory are
paired against the first items sold out of inventory. Speculative futures transactions
are treated this way. Securities transactions can be treated this way in the absence of
further instructions.

224. Fiscal policy: Influencing the direction of an economy through the use of taxation.

225. Fiscal year: The 12-month period that a corporation or government uses for book
keeping purposes. A company’s fiscal year is often, but not necessarily, the same as
the calendar year. A seasonal business will frequently select a fiscal rather than a
calendar year so that its year-end figures will show it in its most liquid condition,
 26

which also means having less inventory to verify physically. The fiscal year of the
U.S. government ends September 30. Abbreviated as FY.

226. Fixed Assets: These assets are acquired for long – term use in the business. They
are not meant for resale. Land and Buildings, plant and Machinery, vehicles and
furniture etc., are some of the examples of fixed assets.

227. Fixed Capital: A method of maintaining capital accounts of partners where two
accounts viz., capital account and current account, are prepared for recording
transactions relating to each partner.

228. Fixed charge: Those expenses incurred each time a batch of product is produced.
Primarily consists of ordering cost for the raw material, engineering costs for machine
setup and preparation for the production run, and work order processing cost; also
known as setup cost.

229. Fixed costs: Operating expenses that are incurred to provide facilities and
organization that are kept in readiness to do business without regard to actual
volumes of production and sales. Fixed costs remain relatively constant until changed
by managerial decision. Within general limits they do not vary with business volume.
Examples of fixed costs consist of rent, property taxes, and interest expense.

230. Fixed exchange rate : A country’s decision to tie the value of its currency to another
country’s currency, gold (or another commodity), or a basket of currencies.

231. Fixed expenses (costs) : Expenses of the business that remain constant over the
short term and do not fluctuate with the sales volume.

232. Fixed-charge coverage ratio : A measure of a firm’s ability to meet its fixed-charge
obligations : The ratio of (net earnings before taxes plus interest charges paid plus
long-term lease payments) to (interest charges paid plus long-term lease payments).

233. Fixed rate : A guaranteed rate that is normally set just below the standard variable
rate and is guaranteed for a certain period of time. If the standard variable rate falls
below the fixed rate you will still have to pay the fixed rate. Once the fixed rate period
ends you will normally pay the lender’s variable rate. Sometimes there are
redemption penalties associated with this type of deal.
 27

234. Fixed rate mortgages : Mortgages with a fixed interest rate. You payment fo9r
principal and interest will not change for the life of the loan. Your monthly payment
may changer if taxes or insurance rates change.

235. Fixed-income security : A security that pays a fixed rate of return. This usually
refers to government, corporate or municipal bonds, which pay a fixed rate of interest
until the bonds mature, and to preferred stock, paying a fixed dividend. Since fixed-
income investments guarantee you an annual payout, they are inherently less risky
than stocks, which do not.

236. Fixed Liabilities: These liabilities are payable generally, after a long period. Capital,
loans, debentures, mortgage etc., are its examples.

237. Fixed-rate mortgage : A type of mortgage where the interest rate does not fluctuate
with general market conditions. Fixed-rate mortgages tend to have higher original
interest rates than adjustable –rate mortgages (or ARMs) do because lenders are not
protected against a raise in the cost of money when they make a fixed-rate loan.

238. Flat scale : The pattern for new issues where shorter – and longer-term yields
display very little difference over the bond’s maturity range.

239. Flat Tax : A tax which is levied at the same rate on all levels of income. Antithesis of
progressive tax.

240. Flat market : A term structure whereby the various delivery months are basically
trading at the same price level or yield.

241. Flexible mortgage : A feature of some mortgages that gives you freedom to change
the amount and frequency of your mortgage payments

242. Flip or to flip : Refers to a trade executed within a relatively short timeframe.

243. Flipper : A trader who takes quick advantage of a profit. It often refers to individuals :
not financial institutions : who quickly sell their Initial Public Offering (IPO) positions.
 28

244. Float : The number of outstanding shares in a corporation available for trading by the
public. A small float means the stock will be more volatile, since a large order to buy
or sell shares can influence the stock’s price dramatically. A large float will mean a
stock is less volatile. Since small capitalization stocks tend to have less shares
outstanding than larger companies, their float is smaller and they tend to be more
volatile. The same is true for closely-held companies.

245. Floating rate : Refers tot he condition whereby exchange rates are relatively free to
change. It can also refer to an interest rate which changes relatively quickly or
frequently.

246. Floating rate contract : An guaranteed investment instrument whose interest

payment is tied to some variable (floating) interest rate benchmark, such as a
specific-maturity Treasury yield.

247. Floor broker : A member of an exchange who executes orders for others.

248. Floor Trader : A member of an exchange who trades for his or her own personal
account.

249. Floatation (Rotation) cost : The costs associated with creating capital through the
issue of new stocks or bonds, including the compensation earned by the investment
banker plus legal, accounting and printing expenses.

250. Fluctuating Capitals : A method of maintaining capital accounts of partners where

only one account viz., capital account is prepared for recording all transactions
relating to each partner.

251. Flux : The Flow Uncertainty Index. It refers to a financial model developed for the
National Association of Insurance Commissioners to qualify the relative risk or
variability of CMOs over a range of interest rate scenarios.

252. FOB (Free-On-Board) destination : A business term meaning that the seller of
merchandise bears the shipping costs and maintains ownership until the merchandise
is delivered to the buyer.
 29

253. Foreclosure : Legal process by which a mortgagor of real property is deprived of his
interest in that property due to failure to comply with terms and conditions of the
mortgage.

254. Foreign draft : This is similar to a bankers’ draft, but is in a foreign currency. Foreign
drafts take around 5 days to arrive depending on where it is sent.

255. Foreign exchange : Refers to currencies other than the United States dollar. It also
refers to transactions, activities, and operations for trading, hedging, and investing in
multiple currencies.

256. Foreign exchange market : Market in which foreign currencies are bought and sold
and exchange rates between currencies are determined. The exchange rate is the
price at which one country’s currency can be converted into another. Some exchange
rates are fixed by agreement, but most are determined by supply and demand on the
exchange market.

257. Foreign market beta : A measure of foreign market risk that is derived from the
capital asset pricing model.

258. Foreign trade or International trade : It refers to the exchange of goods and
services between citizens, business firms or governments of different countries.

259. Forensic accounting : Forensic accounting provides for an accounting analysis that
is suitable to a court of law which will form the basis for discussion, debate and
ultimately dispute resolution. Forensic accounting encompasses investigative
accounting and litigation support. Forensic accounts utilize accounting, auditing and
investigative skills when conducting an investigation. Equally critical is the ability to
respond immediately and to communicate financial information clearly and concisely
in a courtroom setting.

260. Forward : A market similar to futures in terms of deferred deliveries. However,

notable differences include the lack of contract standardization, the lack of a central
clearing house, the potential for substantial counterpart risk, but it allows contractual
term customization and deliveries at times, points and grades other than those listed
for futures contracts. It is also used to refer to the bank currency market.
 30

261. Forward exchange rate : A currency exchange contract that traders have agreed
upon for a future date. The forward rate is usually for one, two, three or six months
and referred to 30-day forward, 60-day forward, etc.

262. Forwarding Note : Form to be filled in while sending goods through goods train.

263. Forward pricing : Practice mandated by the SEC that open-end investment
companies establish all incoming buy and sell orders on the next net asset valuation
of fund shares.

264. Forward rate : A projection of future interest rates calculated from either spot rates or
the yield curve.

265. Forward trading : Trade, usually at the current price, in which actual delivery and
settlement is made at a future date. Forward trade occurs in the commodity, foreign
exchange, stock, bond and futures markets.

266. Fractal market hypothesis : The fractal market hypothesis states that (1) a market
consists of many investors with different investment horizons, and (2) the information
set that is important to each investment horizon is different. As long as the market
maintains this fractal structure, with no characteristic time scale, the market remains
stable. When the market’s investment horizon becomes uniform, the market becomes
unstable because everyone is trading based upon the same information set. Theory
due to Ed Peters.

267. Franking Machine : A machine used to stamp outgoing mail.

268. Free delivery : Securities industry procedure whereby delivery of securities sold is
made to the buying customer’s bank without requiring immediate payment; thus a
credit agreement of sorts. Antithesis of delivery vs. payment.

269. Free on Board (FOB) : Implies that distribution services like transport and handling
performed on goods up to the customs frontier are included in the price.

270. Free trade Zone (FTZ) : An area, usually a port of entry, designated by the country
for duty-free entry of goods. As long as the goods do not go into the country from the
 31

ftz, no duty is assessed. While in the ftz, goods may be processed, packaged,
serviced or displayed.

271. Freed up : A term used to indicate that an underwriting syndicate’s members are no
longer restricted to the fixed price agreed upon in the agreement among underwriters
and are permitted to trade the security on a free market basis.

272. Free riding : Has several meanings. It can refer to a customer account which
engaged in purchases and sales without paying for the securities. There are several
exceptions for some markets which may permit day-trading waivers or no
reconciliation until final settlement or reciprocal closeout of position. It can refer to an
underwriter withholding a portion of a hot issue for the benefit of its own account.

273. Free trade : Refers to the unrestricted or unimpeded process of conducting business
or transactions.

274. Freehold : If you buy a property which is freehold it means that both the land and the
property is yours, unlike leasehold where the land would not belong to you.

275. Friendly takeover : An acquisition of one company by another in which the boards of
both companies agree to the terms of the transaction.

276. Front office : The area or function which relates to trading, investing, or sales
activities for a financial firm. Orders start here, flow through the middle office, if any,
and get processed by the back office.

277. Front-end load : Refers to charges which are imposed upon the purchase or
acquisition of an investment position. Many times these charges are on a sliding
scale. Sometimes, these charges are viewed as impediments for early withdrawals.
They are called front-end because they occur at the beginning of the investment
process.

278. Frozen account : Occurs when a client fails to pay for securities within the allotted
time. Subsequent transactions can only occur if the account has sufficient funds or
securities on deposit to complete the transactions. The frozen status or freeze can be
removed only after the account complies with existing rules and regulations for an
established time frame.
 32

279. Full cost recovery : Adjusting fees/ prices for goods/ services to where all cost o
operations and maintenance are covered for supplying the given goods or services.

280. Full disclosure concept: This concept deals with the convention that all information
which is of material importance should be disclosed in the accounting statements.
The Companies Act 1956 makes it compulsory to provide all the information in the
prescribed form.

281. Full- service brokers : Brokers who execute buy and sell orders, research
investments, help investors develop and meet investment goals and give advice to
investors. They charge commissions for their work. During a bull market, when stocks
are going up consistently, good ideas are a dime a dozen. But when the markets turn
choppy, solid advice can save you. Some full-service firms offer a range of good
mutual funds, estate-planning services and tax advice. A broker will set up a financial
profile for you – based on your assets, income and goals – and advise you
appropriately. All of this, of course, will cost you a lot more than using a bare bones
discount broker.

282. Fund : General term for any investment vehicle which pools together the money of
many small individual investors and invests it in certain markets and securities
according to a defined set of investment aims and objectives. Covers such
investments as unit trusts, investment trusts and pension plans.

283. Fund manager : A fund manager is employed to invest money for (amongst other
things) unit trusts and investment trusts. Fund managers aim to outperform their
chosen index by buying shares, which they think will do particularly well. They can
also choose to keep a percentage of their fund in cash if they’re not optimistic about
the outlook for the stock market. Naturally, fund managers get paid to do this, so
charges for an actively managed fund tend to be higher than for an index tracker.

284. Fundamental analysis : Fundamental analysis asserts that a stock’s price is

determined by the future course of its earnings and dividends. The fundamental
analyst tries to determine what the intrinsic value of a stock’s underlying business is
by looking at its financial statements and its competitive position within its industry. if
this intrinsic value is greater than the market price of the stock, the stock is said to be
undervalued. In other words, the company has greater earning potential than its stock
 33

price would indicate. Fundamental analysis is the antithesis of technical analysis,

which focuses on stock-price movements instead of underlying earnings potential.

285. Fundamentals : Usually refers to the underlying economic factors affecting a

particular market, country or sector and will include such aspects as industrial output,
wages and raw materials costs, currency strength or weaknesses, trade balance and
so on.

286. Future : A term used to designate all contract covering the sale of financial
instruments or physical commodities for future delivery on a commodity exchange.

287. Future value : The amount of money than an investment made today (the present
value) will grow to by some future date. Since money has time value, we naturally
expect the future value to be greater than the present value. The difference between
the two depends on the number of compounding periods involved and the going
interest rate.

288. Futures : An agreement to buy or sell a set amount of a commodity or security in a

designated future month at a price agreed upon today by the buyer and seller. A
futures contract differs from an option because an option is the right to buy or sell,
whereas a futures contract is the promise to actually make a transaction. A future is
part of a class of securities called derivatives, so named because such securities
derive their value from the worth of an underlying investment.

289. Future Contracts : Instruments predicated on a cash commodity or currency, a

financial instrument, or an index. These are standardized contracts which are traded
on organized exchanges. Also, these contracts are subject to industry and exchange
regulations and government regulatory bodies and laws. The standardization is one
of the key factors which differentiates these instruments from forward contracts. Other
factors are the standardization of margin or performance bond procedures and the
high degree of anonymous offset. Futures contracts can be offset by a trade opposite
to the initial transaction, and EFP, or a good delivery. Good deliveries can be satisfied
by either the delivery of the actual commodity or financial instrument or by a final
cash payment for Cash Settlement markets.

290. Futures option : An option on a futures contract.

 34

291. G-7 : The Group of Seven Nations. The membership consists of Britain, Canada,
France, Germany, Italy, Japan, and the United States of America.

292. Gaining Ratio : The ratio in which the retired or deceased partner’s ratio (share) is
acquired by the remaining partners.

293. Generally accepted Accounting Principles: They are also known as Basic
Accounting Concepts. These are the fundamental ideas or basic assumptions
underlying the theory and practice of accounting. They are the broad working rules for
all accounting activities. They are developed and accepted by the accounting
profession. These principles bring uniformity in the practice of accounting.

294. Gamma : The second derivative of an option. It measures the expected change in
the delta given a change in the underlying instrument.

295. GAP : The term used to described differences or imbalances in asset and liability
categories or buckets.

296. Gearing : A measure of exposure. It relates the number of warrants that can be
purchased for the same price of the stock. For example, if the stock is trading at 150
and the warrants are trading at 30, then the gearing is 5.00 or 5-to –1.

297. GEM (Growing Equity Mortgage) : Mortgage in which annual increases in monthly
payments are used to reduce outstanding principal and to shorten the term of the
loan.

298. General Accounting : Involves the basic principles, concepts and accounting
practice, recording, financial statement preparation, and the use of accounting
information in management.

299. General Agreement on Tariffs and Trade (GATT) : A trade part ratified in 1994 that
cut tariffs world-wide, reduced agricultural subsidies, standardized copyright and
patent protection and set up arbitration panes. GATT was also an institution that
oversaw international trade issues. The institution changed its name to the World
Trade Organization after the trade pact was ratified.

300. General index : Index of leading stocks on the Madrid Stock Exchange.
 35

301. Generally Accepted Accounting Principles (GAAP) : Guidelines that explain what
should be done in specific accounting situations as determined by the Financial
Accounting Standards Board. U.S. companies that adhere to GAAP are said to be
more transparent and easier to analyze financially than companies in many foreign
countries. In fact, the differences in accounting standards make it difficult to compare
the earnings of companies in different countries.

302. Generally Accepted Auditing Standards (GAAS) : In the us, GAAS are the broad
rules and guidelines set down by the auditing standards board of the American
institute of certified public accountants (aicpa). In carrying out work for a client, a
certified public accountant would apply the generally accepted accounting principles
(GAAP); if they fail to do so, they can be held to be in violation of the aicpa’s code of
professional ethics.

303. General-purpose Financial statements : The financial reports intended for use by a
variety of external groups; they include the balance sheet, the income statement, and
the statement of cash flows.

304. Global funds : A fund that invests in stocks located throughout the world while
maintaining a percentage of assets. Global funds tend to be the safest foreign-stock
investments, but that’s because they typically lean on better-known stocks.

305. Global depository receipt : A receipt denoting ownership of foreign-based

corporation stock shares which are traded in numerous capital markets around the
world.

306. Globalization : The name for the process of increasing the connectivity and
interdependence of the world’s markets and businesses. In its literal sense,
globalization is a social change, an increased connectivity among societies and their
elements due to transculturation; the explosive evolutions of transport and
communication technologies to facilitate international cultural and economic
exchange are examples of globalization.

307. Going Concern Concept: It is assumed that the business will continue for a long
time. With this assumption fixed assets are recorded in the books at their original
cost. Keeping this assumption in view, prepaid expenses are not treated as the
 36

expenses of the year in which they are incurred. It is assumed that the business
derives benefit out of it (prepaid expenses) in the years to come.

308. Gold bars : Bars with a minimum content of 99.5% gold, which may be held by
central banks or traded by ihnvestors.

309. Gold bond : Bonds issued by gold-mining companies and backed by gold. The
bonds make interest payments based on the level of gold prices.

310. Gold bullion : Investment-grade, pure gold, which may be smelted into gold coins or
gold bars.

311. Gold Certificate : Certificate of an investor, that shows proof of ownership of gold
bullion.

312. Gold standard : A monetary system based on gold. The basic currency unit to a
country is pegged to a specified amount of gold.

313. Goodwill : Goodwill refers to the reputation or good name of a firm. It is a force which
makes the old customers to go to the same shop again and again. It is this force
which makes the old customers to go to the same shop again and again. It is this
force which facilitates the firms to earn over and above the normal profits. Thus,
goodwill is the present value of a firm’s anticipated excess earnings.

314. Grace period : The specified period after a premium payment is due, in which the
policyholder may make such payment, and during which the protection of the policy
continues.

315. Grantor : A person who, by a written instrument, transfers to another interest in land.

316. Great depression : The world-wide economic hard times, which began after the
stock market collapse on October 28, 1929, and continued through most of the
1930s.

317. Gray knight : In a merger or acquisitions, a gray knight is an acquiring company that
outbids a while knight in pursuit of its own best interests, although it is friendlier than
a hostile bidder.
 37

318. Gray List : Formal roster of stocks that can be traded by the block desks, but not in
risk arbitrage because an investment bank is involved with the company on nonpublic
activity. A stock’s presence on this list should never be conveyed to anyone outside
the trading area, much less outside the firm.

319. Gray market : Describes the sale of securities that have not officially been issued to
firms other than the underwriting syndicate. This type of market serves as a good
indicator of demand for a new issue in the public market.

320. Great Call : Used in the context of general equities. Potential customer who may
have an interest in participating in a particular trade if customer’s pass inquiry or
activity is any indication.

321. Greater fool theory : An investment notion that even when a stock is fully valued by
conventional standards, there is room for upward movement because there are
enough buyers to push prices farther upward purely on speculation or hype.

322. Green : A mortgage backed securities term which indicates mortgage which are not
seasoned yet. Typically, a mortgage that is less than 30 months old is considered
green.

323. Gross Domestic Product (GDP) : The total value of goods and services produced
by a nation. The GDP is made up of consumer and government purchases, private
domestic investments and net exports of goods and services. In the U.S. it is
calculated by the Commerce Department every quarter, and it is the main measure of
economic output. Because GDP measures national output, and strong output is
indicative of a healthy economy, bond prices react negatively to strong GDP data. A
strong economy ignites inflationary fears, which is a negative for bond prices.
Equities, on the other hand, tend to perform well when GDP is rising since earnings-
growth prospects are better during economic expansions.

324. Gross margin : A company’s profitability after the costs of production have been
paid. Gross margin is calculated by dividing gross income (revenue after production
costs are subtracted) by revenue and then multiplying by 100. The result is expressed
as a percentage. Gross margin shows you how profitable the basic business of a
 38

company is a before administrative costs, taxes and depreciation have been taken
out. Operating markets may paint a truer picture of a company’s profitability.

325. Gross Margin percentage : The gross margin from an income statement divided by
net sales revenue.

326. Gross National Product (GNP) : The dollar value of all goods and services
produced in a nation’s economy. Unlike gross domestic product, it includes goods
and services produced abroad.

327. Gross Profit / Loss: the difference between net sales and the cost of goods sold is
the gross profit. If cost of goods sold is more than net sales, it results in gross loss.
Gross profit / loss will be transferred from trading account to profit and loss account.

328. Gross profit Margin analysis : Indicates what the company’s pricing policy is and
what the true mark-up margins are. Calculated by : revenue – cost of goods sold /
revenue.

329. Gross spread : The difference between the price that investors are charged for a
security and the amount of proceeds that are paid to the issuer. In the securities-
underwriting business, those proceeds are the total amount of fees that a company
pays to an underwriting group in connection with a public offering of its stock or
bonds. This includes the selling concession paid to members of the underwriting
group and the underwriting and management fees that are paid to the securities firms
in charge of the offering.

330. Group life insurance : Group life is designed to pay a benefit, in either lump sum
form or as a dependants’ pension, on the death of the member.

331. Growth fund : As its name implies, this type of fund tends to look for the fastest –
growing companies on the market. Growth mangers are willing to take more risk and
pay a premium for their stocks in an effort to build a portfolio of companies with
above-average earnings momentum or price appreciation. Growth stock funds usually
have higher return volatility than most funds. This means that if the market declines, a
growth fund’s return will tend to decline more than the overall market. On the upside,
if the market rallies, growth funds typically outperform most market measures such as
 39

the S & P500. A growth fund invests in stocks of all market capitalization ranges –
small, medium and large.

332. Growth phase : A phase of development during which a company experiences rapid
earnings growth as it produces new products and expands market share.

333. Growth Rates : Compound annual growth rate for the number of full fiscal years
shown. If there is a negative or zero value for the first or last year, the growth is N.M.

334. Hard asset : Also known as a tangible asset, a hard asset is one whose value
depends on particular physical properties. These include reproducible assets such as
buildings or machinery and non-reproducible assets such as buildings or machinery
and non-reproducible assets such as land, a presence, such as goodwill or a
copyright, are called intangible assets. An industrial company with a lot of hard assets
(factories, machinery, etc) is best valued by its price-to-book ratio. But companies
that have a lot of intangible intellectual assets (such as software makers or
pharmaceutical companies) should be valued by other means.

335. Hedge : The act of protecting a position. Hedges can be either Long or Short.
Hedges are often done with derivative products. A Long Hedge refers to a position
whereby a derivative contract is purchased to protect against a short actual position.
A short Hedge is a position whereby a derivative is sold to protect against a long
actual position.

336. Hedge fund : A private investment partnership, owned by wealthy individuals and
institutions, which is allowed to use aggressive strategies the are unavailable to
mutual funds, including short selling, leverage, program trading, swaps, arbitrage and
derivatives.

337. Hedging : A strategy designed to reduce investment risk using call options, put
options, short selling or futures contracts. A hedge can help lock in existing profits.
Examples include a position in a futures market to offset the position held in a cash
market, holding a security and selling that security short and a call option against a
shorted stock. A perfect hedge eliminates the possibility for a future gain or loss. An
imperfect hedge insures against a portion of the loss.
 40

338. Hedging paradox : When favorable basis movements do not guarantee a favourable
global result for the hedge. Also, it can occur when the basis behavior is unfavorable
yet the hedge is still beneficial.

339. Hedge ratio (delta) : For options, ratio between the change in an option’s theoretical
value and the change in price of the underlying stock at a given point in time. For
convertibles, percentage of a convertible bond representing the number of underlying
common shares sold against the shares into which bonds are convertible. If a
preferred is convertible into 2000 common shares, a 75% hedge ratio would be short
(long) 1500 common for every 1000 preferred long (short).

340. Hedge wrapper : An options strategy in which an investor with a long position in an
underlying stock buys an out-of-the-money put and sells an out-of-the-money call.
The hedge wrapper defines a range where the stock will be sold at expiration of the
option, which way the stock moves.

341. Hedged Portfolio: A portfolio consisting of a long position in the stock and a long
position in the put option on the stock, so as to be risk less and produce a return that
equals the risk-free interest rate.

342. Hedged position : A hedged position occurs if you own a second asset that should
move in the opposite way the first asset would react to changes in the market. For
example, you own a stock and a put and / or a call on the stock.

343. Hemline theory : A theory that sotck prices move in the same direction as the
hemlines of women’s dresses. For example, short skirts (1920s and 1960s) are
symbolic of bullish markets and long skirts (1930s and 1940s) are symbolic of bearish
markets.

344. Herstatt risk : The risk of loss in foreign exchange trading that one party will deliver
foreign exchange but the counter party financial institution will fail to complete its end
of the contract. this is also referred to as settlement risk.

345. High flyer : High-priced and highly speculative stock that moves up and down
sharply over a short period. Generally glamorous in nature due to the capital gains
potential associated with them; also used to describe any high-priced stock.
Antithesis of sleeper.
 41

346. High price : The highest (intraday) price of a stock over the past 52 weeks, adjusted
for any stock splits.

347. High-yield bond : These are the lowest quality bonds. Bonds with credit ratings
below BBB from Standard & Poor’s or speculative because they have a greater
chance of default than investment grade bonds. High-yield bonds are usually issued
by smaller companies without long track records or by companies with questionable
credit ratings. To compensate for the additional risk, issuers offer higher yield than
investment grade bonds. In recent years however, junk-bond yields have declined as
their popularity has increased and default rates have slowed. They are also called
junk bonds.

348. Hire purchase (HP) : A method of buying goods in which the purchaser takes
possession of them as soon as he has paid an initial installment of the price (a
deposit) and obtains ownership of the goods when he has paid all the agreed number
of subsequent installments. A hire-purchase agreement differs from a credit-sale
agreement and sale by installments (or a deferred payment agreement) because in
these transactions ownership passes when the contract is signed. It also differs from
a contract of hire, because in this case ownership never passes. Hire-purchase
agreements were formerly controlled by government regulations stipulating the
minimum deposit and the length of the repayment period.

349. Hire and Purchase agreement : A contract (more fully called contract of hire with an
option of purchase) in which a person hires goods for a specified period and at a fixed
rent, with the added condition that if he shall retain the goods for the full period and
pay all the installments of rent as they become due the contract shall determine and
the title vest absolutely in him, and that if he chooses he may at any time during the
term surrender the goods and be quit of any liability for future installments upon the
contract.

350. Historical cost : Assets, stock, raw materials etc. can be valued at what they
originally cost (which is what the term ‘historical cost’ means), or what they would
cost to replace to today’s prices.

351. Historical cost accounting : An accounting principle requiring all financial statement
items to be based on original cost. It is usually based upon the dollar amount
 42

originally exchanged in an arm’s-length transaction; an amount assumed to reflect the

fair market value of an item at the transaction date.

352. Hold : To maintain ownership of a security over a long period of time. “Hold” is also a
recommendation of an analyst who is not positive enough on a stock to recommend a
buy, but not negative enough on the stock to recommend a sell.

353. Holding company : A company whose principal assets are the securities it owns in
companies that actually provide goods or services. A holding company enables one
corporation and its directors to control several companies by holding a large stake in
the companies.

354. Honorarium : It is the amount paid to those persons who are not employees of the
organization. Since such payments are made quite regularly they are treated as
revenue expenditure. Therefore, they are shown on the expenditure (debit) side of the
Income and Expenditure a/c.

355. Horizontal Filing : A system of filing under which documents are kept in files in a flat
position.

356. Horizontal spread : A spread which is composed to two puts or two calls on the
same underlying instrument. It is called horizontal because both options have the
same strike or exercise price but two different expiration dates. Generally, the trade is
placed with the nearby option sold and the deferred option purchased. This is an
attempt to capitalize on the acceleration in time value decay for the nearby relative to
the deferred contract month.

357. Hostile : Often refers to an unsolicited and unwanted bid by the target company. it
rejects this bid and indicates that the company does not want to be acquired by that
bidder.

358. Hostile takeover : An acquisition of one company by another despite resistance from
the target company’s board. Often an acquirer will take its transaction directly to the
shareholders of the target company, offering to buy their shares through a tender
offer or seeking their approval to remove opposing members from the target
company’s board.
 43

359. Hot issues : Stocks which trade at an immediate premium relative to their initial
offering price on the effective date. There are restrictions and prohibitions regarding
trading in these issues. These constraints apply to brokerage firm employees and
their immediate families. Other parties may also be subject to such constraints.

360. Hot Money : Money that moves across country borders in response to interest rate
differences and that moves away when the interest rate differential disappears.

361. Human capital : The unique capabilities and expertise of individuals that are
productive in some economic context.

362. Hundi : Hundies are bills of exchange in the Indian language. It usually written in a
local language and regulated by local customs and traditions. It is order to the debtor
to make the payment of specified amount after specified period.

363. Hurdle rate : A term used in the budgeting of capital expenditures meaning the
required rate of return in a discounted cash flow analysis. If the expected rate of
return in a discounted cash flow analysis. If the expected rate of return on an
investment is below the hurdle rate, the project is not undertaken. The hurdle rate
should be equal tot he incremental cost of capital.

364. Hybrid : A security which has mixed characteristics. One example is a convertible
bond. It can have a coupon and pay interest and therefore partially behave like a
credit market instrument. However, its conversion feature also imbues the instrument
with equity characteristics.

365. Hybrid fund : A mutual fund that invests in a combination of stocks, bonds, and other
securities.

366. Hybrid instrument : A package containing two or more different kinds of risk
management instruments that are usually interactive.

367. Hypothecation agreements : Legal documents which define the pledging of

collateral. A mortgage defines the collateral for a real estate loan or Note and a
securities hypothecation agreement permits margin accounts and figures accounts by
stating what is being pledged to cover positions, debit balances, or even deficit
balances. Generally, this document allows the owner to enjoy the usage of the
 44

property provided that no default occurs. In the event of a default the property can go
the creditor to satisfy the claim. The residual value, if any, would then go to the
owner.

368. Illiquid : An asset not readily convertible into cash. Illiquid investments include
antique cars, paintings and stamp collections. An illiquid security is one without an
active secondary market, making it difficult for an owner of the security to sell it.
Small-capitalization stocks tend to be illiquid because they have fewer shares
outstanding and lower trading volumes. That can make them more volatile to own.

369. IMF : The international Monetary Fund.

370. Implied price : The price computed by a model which considers a comparable
benchmark, volatility, and spread adjustment. It is used in the absence of a current
market price.

371. Implied repo rate : Influenced by the cost of funds, tax rates, deductibility of carry
charges, yields, the time to expiration and organizational constraints. It indicates the
implied rate of return for specified investments. While many quote services list an
assumed or benchmark Implied Repo Rate, there are many because each investor
has his or her own schedule of financing costs and investment opportunities.

372. Implied volatility : The current volatility or the level of volatility required to generate
an option premium given a known market price for the underlying, an interest rate, an
expiration date and a strike price.

373. Imports : Goods and services one country purchases from another. The opposite of
exports, too many imports can result in an unfavorable balance of trade.

374. Import Houses : Collect orders through their brokers and then import goods from
abroad according to the orders received.

375. Import Trade : When a trader of one country purchase goods from the traders of
other countries, this trade is called Import Trade.

376. Imprest System: Imprest system is one of the methods upon which the Petty Cash
Book may be maintained. The petty expenses of a period is estimated in advance.
 45

The estimated amount is handed over to the petty cashier in the beginning of the
period. Petty cashier meets the petty expenses out of that amount. At the end of the
period, petty cashier submits the record of total expenses of the period to the chief
cashier. Then the petty cashier is reimbursed with the actual expenditure paid by him.
So now the petty cashier has the same amount of cash as was in the beginning of the
previous period. This system is known as imprest system of petty cash book.

377. Imputed costs : Refer to the cost of an asset, service, or company that is not
physically recorded in any accounts but is implicit in the product.

378. Imputed value : Refers to the value of an asset, service, or company that is not
physically recorded in any accounts but is implicit in the product, e.g., the opportunity
cost of cash remaining in a savings account and not invested.

379. Income: Periodic interest or dividend distributions obtained from a fund.

380. Income and Expenditure Account : This account is just like profit and loss account
of trading concerns. It is prepared on the same lines in which a Trading and Profit and
Loss Account is prepared. It is a nominal account. All losses and expenses are
recorded on its debit side. All incomes and gains will be shown in credit side. The
balance of this account represents either the excess of income over expenditure or
excess of expenditure over income.

381. Income tax : This is tax you pay on the income you earn each year above a certain
amount. As well as your salary, income tax is also charged on interest and dividends
you receive. The amount of tax you pay depends on the amount of money you earn
and on your allowances.

382. Income earned but not received: Certain items of income are earned during the
current accounting year but have not been actually received by the end of the same
year. Such income is known as ‘Accrued Income’. For example, interest on loan
commission, rent etc.

383. Income received in advance: Income due for the next period but received in the
current year itself. For example, Tuition fee received in advance.
 46

384. Incorporated : A legal entity that has undergone incorporation through approval by a
state government.

385. Incremental : Increasing gradually by regular degrees or additions.

386. Incremental cash flows : Difference between the firm’s cash flows with and without
a project.

387. Incremental cost : The increase or decrease in costs as a result of one more or one
less unit of output.

388. Incremental cost of capital : The weighted cost of the additional capital raised in a
given period. Weighted cost of capital, also called composite cost of capital, is the
weighted average of costs applicable to the issues of debt and classes of equity that
compose the firm’s capital structure. Also called marginal cost of capital.

389. Clause : Under this clause any loss caused by the negligence of the master or a
crew members is also covered. The damage caused to the cargo in loading and
unloading operations is also recoverable.

390. Indemnify : Used in insurance policy agreements as to compensation for damage or

loss. Hold harmless

391. Indemnity : Compensating any loss or damage.

392. Indent : An order for goods received from or, sent to abroad.

393. Indenture : Agreement between lender and borrower that details specific terms of the
bond issuance. Specifies legal obligations of bond issuer and rights of bondholders.
An indenture spells out the specific terms of a bond, as well as the rights and
responsibilities of both the issuer of the security and the holder.

394. Index : A means of continually measuring the movement of a particular set of

statistics over periods of time. Most unit trust fund managers measure their fund’s
performance against that of an appropriate ‘benchmark’ index with the aim of at least
matching its progress or, better still, beating it.
 47

395. Index arbitrage : Buying or selling baskets of stocks while at the same time
executing offsetting trades in stock-index futures. For example, if stocks are
temporarily cheaper than futures, an arbitrageur will buy stocks and sell futures to
capture a profit on the difference, or spread, between the two prices. By taking
advantage of momentary disparties between markets, arbitrageurs perform the
economic function of making those markets trade more efficiently.

396. Index fund : A mutual fund that seeks to produce the same return that investors
would get if they owned all the securities in a particular index. The most common
variety is an S & P 500 index fund, which tries to mirror the return of the Standard &
poor’s 500 – stock index. Index funds have the lowest expense ratios in the fund
universe and are also very tax-efficient because of their low turnover ratios. They are
good funds for novice investors.

397. Index futures : A futures contract on an index (such as a foreign stock index) in the
futures market.

398. Index linked : Insurance where the level of cover increases in line with an index of
prices or earnings.

399. Index method : Technique to calculate rates of return that is based on initial and
terminal values.

400. Index model : A model of stock returns using a market index such as the S & P 500
to represent common or systematic risk factors.

401. Index option : An agreement that gives an investor the right, but not the obligation,
to buy or sell the basket of stocks represented by a stock-market index at a specific
price on or before a specific date. Index options allow investors to trade in a particular
market or industry group without having to buy all the stocks individually.

402. Index tracking : An index tracking fund aims to follow a particular index as closely as
possible. It does not aim to beat it. It invests only in the companies that make up that
index. Index tracking removes the need to employ fund managers, which means
charges tend to be lower.
 48

403. Index swap : A swap of a market index for some other asset, such as a stock-for-
stock or debt-for-stock swap.

404. Indexation :A method by which benefits are increased at periodic intervals by a

factor derived from an index of prices or earnings.

405. Indexing : A method of making reference to the records which have been filed.

406. Indemnity Bond : It is the document to be filled in by the purchaser of goods, in case
of R/R is lost declaring, that the purchaser will compensate for loss, if any, to the
railways in case of default

407. Inflation : The rate at which the general level of prices for goods and services is
rising. Inflation has an uncanny ability to erode the value of securities that don’t grow
fast enough. That’s why investing only in a money market fund can be more risky
than it appears on the surface. If inflation is rising at 3% a year and your money
market is growing at 5% or 6%, you won’t have much money left over for your
retirement. Measures of inflation include the consumer price index (CPI) and the
producer price index (PPI).

408. Inflation accounting : A system of accounting which, unlike historical cost

accounting, takes into account changing prices.

409. Inflation adjustment : Whenever any figure is adjusted for inflation / deflation. It
simply means that all fluctuations in price that are directly attributable to inflation /
deflation are reflected into that figure through either adding or subtracting the amount
that is directly caused by inflation / deflation.

410. Inflation hedge : Term describing an investment that performs well when inflation
heats up.

411. Inflation-indexed bonds : These Treasury’s are designed to keep pace with
inflation. The principal is adjusted to match changes in the consumer price index
(CPI), while the interest rate remains fixed. In this way, inflation can not erode the
value of your principal. New in 1997, they are officially known as Treasury Inflation
Protection Securities, or TIPS.
 49

412. Inheritance tax : This tax is payable at the time of death, on any items (money or
otherwise) where ownership changes on death or within 7 years before. There is no
inheritance tax on the first portion of the deceased person’s estate and transfers
between husband and wife are exempt. There are other exemptions and the rules
governing these can be complex.

413. Information Coefficient (IC) : The correlation between predicted and actual stock
returns, sometimes used to measure the contribution of a financial analyst. An IC of
1. 0 indicates a perfect linear relationship between predicted and actual returns, while
an IC of 0. 0 indicates no linear relationship.

414. Initial filing : His various meanings. It could refer to a form that is filed with the
Securities and Exchange Commission in advance of a major event, such as a public
offering or a share repurchase. It could also refer to filings that occur before legal
inside transactions.

415. Initial public offering : The first time a company issues stock to the public. This
process often is called “going public.” Securities offered in an IPO are often, but not
always, those of young, small companies seeking outside equity capital and a public
market for their stock. Investors purchasing stock in IPOs generally must be prepared
to accept very large risks for the possibility of large gains.

416. Insider : A person, such as an executive or director, who has information about a
company before the information is available to the public. An insider also is someone
who owns more than 10% of the voting shares of a company. all insider trades must
be disclosed to the Securities and Exchange Commission. However, it is illegal for
insiders to trade on corporate information that hasn’t been released to the public yet.
Many professional investors watch insider activity closely for clues to a company’s
future.

417. Insider information : Important knowledge about a company’s affairs which has not
been made public. It is illegal to trade on such information in a number of countries
including the United States. Often this information by nature is only viewed by senior
officials or those working closely with executives.

418. Insider trading : In one respect, it refers to the legal trading of securities by
corporate officers based on information available to the public. In another respect, it
 50

refers to the illegal trading of securities by any investor based on information not
available to the public. Many professional investors watch insider activity closely for
clues to a company’s future.

419. Insiders : These are directors and senior officers of a corporation-in effect, those
who have access to inside information about a company. An insider also is someone
who owns more than 10% of the voting shares of a company.

420. Insolvency : Occurs when a business is unable to pay debts as they fall due.

421. Insolvency risk : The risk that a firm will be unable to satisfy its debts. Also known
as bankruptcy risk.

422. Insolvent: The inability of a person to pay his debts when they become due. The
condition in which the liabilities exceed assets.

423. Instant access : Accounts where you don’t lose interest even though you withdraw
money without giving the bank notice. The One account gives you instant access to
your funds. All you have to do is write a cheque, arrange a transfer or use your
Switch or VISA cards.

424. Instrument : A written document.

425. Institutional Investors : Organizations that invest, including insurance companies,

depository institutions, pension funds, investment companies, mutual funds, and
endowment funds.

426. Institutionalization : The gradual domination of financial markets by institutional

investors, as opposed to individual investors. This process has occurred throughout
the industrialized world.

427. Insurable interest : A pecuniary interest of the policy holder in the property or life
insured.

428. Insurable risk : The risk which can be insured.

 51

429. Insurance : It is a contract in writing whereby the insurer agrees after receiving
premium as consideration to indemnify the insured against loss of the subject matter.

430. Insured : A person or organization covered by an insurance policy.

431. Insurer : The party to the insurance contract who promises to pay losses or benefits,
usually an insurance company.

432. Intangible assets: These are the assets which lack physical substance. The
examples are : patents, trademarks, copyrights etc. In accounting, for intangible
assets, the term ‘amortization’ is used in the place of depreciation. Intangible assets
are generally amortised on straight line basis method. As per the present Income Tax
Act intangible assets are also eligible for depreciation.

433. Intangible costs: Expenditure incurred to create an intangible asset. For example,
legal fees to negotiate a lease, the cost to acquire a license, etc.

434. Intangibles (net) : Intangible assets, including goodwill, trademarks, patents,

catalogs, brands, copyrights, formulas, franchises, and mailing lists, net of
accumulated amortization.

435. Intercom System : This system is used for internal communication. It is very popular
in offices. It can be used to supplement the PBX system.

436. Intellectual property : Assets such as : copyrights, trademarks, and patents. Logos
or special colors may also be intellectual properties.

437. Intellectual property rights : Patents, copyrights, and proprietary technologies and
processes that may be the basis of a company’s competitive advantage.

438. Interest : Either the interest rate or the income from a credit instrument.

439. Interest rate : The rate of interest charged for the use of money, usually expressed
as an annual rate. The rate is derived by dividing the amount of interest by the
amount of principal borrowed. For example, if a bank charged $ 50 a year to borrow
$1,000, the interest rate would be 5%. Interest rates are quoted on bills, notes,
bonds, credit cards and many kinds of consumer and business loans. Rates in
 52

general trend to rise with inflation and in response to the Federal Reserve raising key
short-term rates. A rise in interest rates has a negative effect on the stock market
because investors can get more competitive returns from buying newly issued bonds
instead of stocks. It also hurts the secondary market for bonds because rates look
less attractive compared to newer issues.

440. Interest rate cap : An interest rate agreement in which payments are made when the
reference rate exceeds the strike rate. Also called an interest rate ceiling.

441. Interest rate floor : An interest rate agreement in which payments are made when
the reference rate falls below the strike rate.

442. Interest rate risk : This is the danger that prevailing interest rates will rise
significantly higher than the rate paid on bonds you are holding. This drives down the
price of your bonds, so if you sell you’ll lose money. This is a serious risk for anyone
investing in long-term bonds, including Treasury’s, because the longer the maturity,
the higher the interest rate risk.

443. Interest rate swap : The contract whereby one party typically agrees to exchange a
floating rate for a fixed coupon rate. There are many variations to this theme. Some of
these other swaps can be cross border, fixed-for-fixed, or floating –for –floating. The
common denominator to these transactions is the swapping of cash flows and not
principal amounts. There are predetermined periodic adjustments in cash flow
payments.

444. Intermediary : A person or organization that offers advice and arranges policies for
clients. Under UK regulations, intermediaries must be either (1) “Tied”, whereby they
represent only one company in the case of life business or a limited number of
companies for general business, or (2) “Independent”, whereby there is not limit on
the number of companies with which they can deal.

445. Interim audit : An audit conducted during the fiscal year usually as a means of
minimizing the work and time involved in concluding the audit after the fiscal year. A
corporation might have an interim audit covering the first nine months of the fiscal
year so that at the end of the fiscal year most of the auditing will focus on the last
three months of the fiscal year thus allowing for a comprehensive audit and early
 53

completion of the audit reports. An interim audit does not usually yield any formal
reports from the external auditors.

446. Interim dividend : The declaration and payment of a dividend prior to annual
earnings determination.

447. Interim financial statements : Financial statements that report the operations of an
entity for less than one year.

448. Interim financing : Short-term financing that’s conditional upon securing

intermediate or long-term financing. Also known as a bridge loan.

449. Intermediate-term : Typically one-ten years.

450. Intermediate cost : The cost involved in the placement of money with a financial
intermediary. The person or institution empowered as the intermediary to make
investment decisions for others. Examples : banks, savings and loan institutions,
insurance companies, brokerage firms, mutual funds, and credit unions.

451. Internal rate of return : An accounting term for the rate of return on an asset. It is
the discount rate on an investment that equates the present value of its cash outflows
to the present value of its cash inflows.

452. International arbitrage : Simultaneous buying and selling of foreign securities and
ADRs to capture the profit potential created by time, currency, and settlement
inconsistencies that vary across international borders.

453. International Development Association (IDA) : Association established to stimulate

country development; it was especially suited for less prosperous nations, since it
provided loans at low interest rates.

454. International Monetary Fund (IMF) : An organization that makes loans and provides
other services intended to stabilize world currencies and promote orderly and
balanced trade. Member nations may obtain foreign currency when needed, making it
possible to make adjustments in their balance of payments without currency
depreciation Abbreviated as IMF.
 54

455. Internet : The global computer network that connects independent networks.

456. Interpolation : A method of approximating a price or yield that is unknown by using

numbers that are known.

457. Intrinsic value : The underlying value of a business separate from its market value
or stock price. In fundamental analysis, the analyst will take into account both the
quantitative and qualitative aspects of a company’s performance. The quantitative
aspect is the use of financial ratios such as earnings, revenue, etc., while the
qualitative perspective involves consideration of the company’s management
strength. Based on such analysis, the fundamental analyst will make a forecast of
future earnings and prospectus for the company to arrive at an intrinsic value of its
shares. The intrinsic value of a share can be at odds with its stock market price,
indicating that the company is either overvalued or undervalued by the market.

458. Intrinsic value of a firm : The present value of a firm’s expected future net cash
flows discounted by the required rate of return.

459. Intrinsic value of an option : The amount by which an option is in the money. An
option that is not in the money has no intrinsic value.

460. Inventory : The monetary value of a company’s raw materials, work in progress,
supplies used in operations and finished goods. Excess inventory on a company’s
balance sheet could indicate a showdown in sales and a lack of pricing power.

461. Inventory turnover : For a company, the ratio of annual sales to inventory; or
equivalently, the fraction of a year that an average item remains in inventory. Low
turnover is a sign of inefficiency, since inventory usually has a rate of return of zero.
For example, if a company had $ 20 million in sales last year but $ 60 million in
inventory, then inventory turnover would be 0.3, an unusually low number. That
means it would take three years to sell all the inventory.

462. Inventory turnover ratio : Computed by dividing annual sales by inventories. It is

usually desirable to have a relatively high inventory turnover ratio relative to
competitors.
 55

463. Inverted market : The market condition whereby the deferred or more forward
delivery months are at a progressive discount to the spot or nearby month. This
condition is marked by premiums for immediate or nearby deliveries. This is also
known as a back wardation market. This is opposite to a contango or carrying charge
market.

464. Inverted yield curve : The market condition whereby the near-term interest rates are
higher than long-term interest rates. For example, the two year rate is greater than
the ten year rate; or, the spot (overnight) rate is higher than the ten year rate; or, the
spot (overnight) rate is higher than the thirty year rate. This inversion may be induced
or result from changes in monetary policy, foreign exchange movements, immediate
liquidity needs within the financial system, constrictions in money / credit and other
financial forces.

465. Investment bank : A securities firm, financial company or brokerage house that
helps companies take new issues to market. An investment bank purchases new
securities from the issuer, then distributes them to dealers and investors, profiting on
the spread between the purchase price and the offering price. Additionally, an
investment bank handles the sales of large blocks of previously issued securities and
private placements. Most investment banks also maintain brokerage operations and
other financial services.

466. Investment company : Firm that, for a management fee, invests pooled funds of
small investors in securities appropriate for its stated investment objectives.

467. Investment decisions : Decisions concerning the asset side of a firm’s balance
sheet, such as the decision to offer a new product.

468. Investment horizon : The actual or expected period that a financial position will be
held. Some organizations and individuals use simple purchase-and-hold strategies,
particularly for fixed income securities. For those parties, the investment horizon
would be the time left to maturity. Other uses of the term are : day, short-term,
intermediate term, and long-term holdings.

469. Investment trust : Unlike a unit trust, which is ‘open –ended’, an investment trust is
effectively a company which, for a management fee, invests the pooled money of
small investors in securities for stated investment objectives. An investment trust is
 56

‘closed-end’ in that it has a fixed number of shares that are traded like stock, often on
many different exchanges. Visit the Flemings website for more details.

470. Invoice Price : Invoice price is the price at which the consignor sends goods to the
consignee. It is cost plus price. Generally, goods are sent on consignment by the
consignor at cost. But sometimes, goods are invoiced at a price higher than cost i.e.,
proforma invoice price. The purpose is to conceal the cost price of the goods from the
consignee. In such a cases, the entries are made by the consignor in his book at the
invoice price. But for ascertaining true profit or loss some adjustments are to be
made.

471. Iou : An informal debt instrument in the form of a written promise to pay back money
owed; e.g. Personal loans and professional services.

472. Irrelevant cost : Any positive or negative implications phenomenon which is not
consequent upon the production process, whether it is denominated in money terms
or not.

473. Issue : In securities, issue is stock or bonds sold by a corporation or a government;

or, the selling of new securities by a corporation or government through an
underwriter or private placement.

474. Issued shares : The number of shares held by parties other than the corporation.
Issued shares are equal to or less than the authorized share amount. It is often relied
upon for modling efforts because two variables define its location and shape. These
two variables are the mean and the standard deviation. It should be noted that normal
distributions with larger standard deviations (or variances) are wider or flatter. This is
because the greater volatility is dispersed over a wider range. Conversely, smaller
standard deviations generate tighter formations which have a pronounced peak
appearance.

475. Issued share capital : Total amount of shares that have been issued.

476. Jettision : The act of throwing overboard part of a cargo in a ship or plane in order to
save the ship or plane.

477. JIT : Refers to Just-in-Time inventory management.

 57

478. Joint account : An agreement between two or more firms to share risk and financing
responsibility in purchasing or underwriting securities, or an account owned jointly by
two or more persons at a bank or brokerage house.

479. Joint costs : Costs incurred to produce a certain amount of two or more products
where the cost of producing one product cannot be logically isolated and cost
allocation is arbitrary.

480. Joint stock company : A company that has some features of a corporation and
some features of a partnership. This type of company has access to the liquidity and
financial reserves of stock markets as a corporation, however, as in a partnership; the
stockholders are liable for company debts and have additional restrictions of a
partnership.

481. Joint venture : An agreement between two or more firms to undertake the same
business strategy and plan of action.

482. Journal : The word “Journal” is derived from the Latin word ‘Journ’ which means day.
Journal means a day book where in day – to – day business transactions are
recorded in chronological order. It is a book of original entry. All the business
transactions are first entered in this book. The process of recording the transaction in
the journal is called Journalising. The entries made in the book are called Journal
Entries.

483. Journal entry : The beginning of the accounting cycle. Journal entries are the
logging of business transactions and their monetary value into the t-accounts of the
accounting journal as either debits or credits. Journal entries are usually backed up
with a piece of paper; a receipt, a bill, an invoice, or some other direct record of the
transaction; making them easy to record and to maintain traceability for each
transaction.

484. Journal Proper: The journal proper is one among the eight subsidiary books. All the
transactions that cannot be entered in the first seven subsidiary books will be
recorded in this book. The form of journal proper is just like a journal. In this there will
be five columns viz., date, particulars, L.F., debit and credit columns. All opening,
 58

closing, adjusting, transferring, rectification entries along with the miscellaneous

transactions not recorded in any other subsidiary book will be recorded in this book.

485. Junk bond : A bond with a speculative credit rating of BB (S & P) or Ba (Moody’s) or
lower. Junk or high-yield bonds offer investors higher yield than bonds of financially
sound companies. Two agencies, Standard & Poors and Moddy’s Investor Services,
provide the rating systems for companies’ credit.

486. Kappa : An option term sometimes used as a synonym for vega, lambda or sigma.

487. Karat : A measure of the purity of gold. Twenty-four Karat (24K) is considered as
pure gold.

488. Keynesian economics : An economic theory of British economist, John Maynard

Keynes that active government intervention is necessary to ensure economic growth
and stability.

489. Keynesian growth models : Models in which a long run growth path for an economy
is traced out by the relations between saving, investing and the level of output.

490. Kickback : In the context of finance, refers to compensation of dealers by sales

finance companies for discounting installment purchase paper. In the context of
contracts, refers to secret payments made to insure that the contract goes to a
specific firm.

491. Knock-out option : An option that is worthless at expiration if the underlying

commodity or currency price reaches a specific price level.

492. Kurtosis : The statistic which describes the degree of peakedness or flatness of a
probability distribution relative to the benchmark normal distribution.
493. Laisse-faire : Doctrine that a government should not interfere with business and
economic affairs.

494. Lambda : An option term sometimes used as a synonym for vega, kappa, or sigma.

495. Lapsed option : An option that no longer has any value because it has reached its
expiration date without being exercised.
 59

496. Last-in first-out : The accounting technique whereby the last items in inventory are
paired against the first items sold out of inventory.

497. Lateral Filing : A filing system in which files are arranged in suspended pockets
hung from shelves.

498. LBO : A Leveraged Buy Out. This transaction relies on borrowing funds. Often these
borrowings are secured by various assets of the company which is targeted for
acquisition.

499. Lease : Contract by which the owner of property allows another to use it for a
specified time, usu. In return for payment.

500. Lead manager : The commercial or investment bank with the primary responsibility
for organizing syndicated bank credit or bond issued. The lead manager recruits
additional lending or underwriting banks, negotiates terms of the issue with the issuer,
and assesses market conditions.

501. Lead-time : The time between the initial stage of a project or policy and the
appearance of results, for example, the long lead-time in oil production because of
the need for new field exploration and drilling.

502. Lease : A contract where a party being the owner (lessor) of an asset (leased asset)
provides the asset for use by the lessee at a consideration (rentals), either fixed or
dependent on any variables, or a certain period (lease period), either fixed or flexible,
with an understanding that at the end of such period, the asset, subject to the
embedded options of the lease, will be either returned to the lessor or disposed off as
per the lessor’s instructions.

503. Leaseback (renting back) : A method of raising finance in which on organization

sells its land or buildings to an investor (Usually an insurance company) on condition
that the investor will lease the property back to the organization for a fixed term at an
agreed rental. This releases capital for the organization, enabling it to be used for
other purposes.
 60

504. Leasehold : If you buy a property that is leasehold it means that you own the
property but not the land the property is on, unlike freehold where you would own
both.

505. Leasehold land : Land held under a lease. The land will eventually revert to the
freehold owner, although there has repossession (e.g. in the Rent Acts). This is the
most landlord maintains possession of the common parts and creates separate
leases for each office. The ownership of each office may subsequently change as
leases are assigned.

506. Ledger: A ledger may be defined as a summary statement of all the transactions
relating to a person, asset, expense or income, which have taken place during a
given period of time. The up to date state of any account can be easily known by
referring to the ledger. Ledger is the principal book of accounts. If helps the
businessman in achieving the objectives of accounting.

507. Leg : A part of piece of a transaction or position. For example, in futures trading there
is a long leg and a short leg to a spread position.

508. Leg up : Used in the context of general equities. (1) Have a portion of the offsetting
side of a trade in your pocket (spoken for) so your capital risk in the transaction is
reduced. (2) Complete one side of a two-sided transaction, as in a swap or
contingency order.

509. Legacies : Legacy denotes the amount received as per the “will” of the decreased
donor. It is a non-recurring capital income. Legacy received is directly added to
Capital Fund.

510. Legal Tender Money : Currency and coins issued by a central bank and
government.

511. Lendable funds : The pool of funds available to borrows; typically categorized by
currency and maturity.

512. Lessee : The person who rents a property from its owner. These properties can be
real estate, precious metals or other assets. When the asset is real estate the lessee
is the tenant.
 61

513. Lessor : The person who leases out a property to another person (lessee). The
lessor either owns the property of holds a master lease which grants ownership-type
powers. In the case of real estate, the lessor would be considered as the landlord.

514. Letter of Credit (LOC) : A form of guarantee of payment issued by a bank on behalf
of a borrower that assures the payment of interest and repayment of principal on
bond issues.

515. Letter of intent : An assurance by a mutual fund shareholder that a certain amount
of money will be invested monthly, in exchange for lower sales charges. In mergers, a
preliminary merger agreement between companies after significant negotiations.

516. Lender of Last Resort : If the Commercial banks fail to secure money, they can go
to the Central Bank of the country as last resort. The central bank helps the banks as
lender of last resort by discounting their bills.

517. Lever Arch File : A file in which a lever is used to open and close the metal arch
through which papers are inserted.

518. Leverage : Refers to the concept of increasing , multiplying, or magnifying the market
impact of an investment. Leverage magnifies both the gains or the losses. In
corporate finance, leverage often means the amount of debt to equity. Borrowing can
enhance shareholder equity returns because the interest is deductible but the profits
remain for the common share investors. For derivative products, little or no margin is
required for placing positions. Depending on the instrument, market, exchange and
other factors, valuation swings may have to be satisfied by new margin or
performance bond monies.

519. Leverage ratios : Measures of the relative value of stockholders, capitalization, and
creditors obligations, and of the firm’s ability to pay financing charges. Value of firm’s
debt to the total value of the firm (debt plus stockholder capitalization).

520. Leveraged beta : The beta of a leveraged required return; that is, the beta as
adjusted for the degree of leverage in the firm’s capital structure.

521. Leveraged company : A company that has debt in its capital structure.
 62

522. Leveraged stock : Stocks financed with credit, such as that purchased on a margin
account.

523. Leveraged portfolio : Investment at least partially financed by borrowing.

524. Liabilities: Liabilities are the obligations of the business. They are the debts payable
by the enterprises in future. They can be classified into: (I) fixed liabilities (loans,
debentures etc.) (ii) Current liabilities (creditors, bills payable etc.) and (iii) Contingent
liabilities (future liabilities)

525. Liability swap : An interest rate swap used to alter the cash flow characteristics of an
institution’s liabilities so as to provide a better match with its assets.

526. Licensing : Arrangement in which a local firm in the host country produces goods in
accordance with another firm’s (the licensing firm’s) specifications; as the goods are
sold, the local firm can retain part of the earnings.

527. Lien : A claim against a property.

528. Life annuity : A contract that provides an income during the remaining lifetime of the
purchaser.

529. Life Membership Fees : Some organizations collect life membership fee from their
members. If any member pays Life membership fee, he/she need not pay the annual
subscription every year. The life membership fee may be treated as capital receipt or
revenue receipt depending upon the circumstances. Sometime a part of it may be
treated as revenue income.

530. Limitation : A certain period limited by statute after which actions, suits, or
prosecutions cannot be brought in the courts.

531. Limited liability : The legal protection given stockholders whereby they are
responsible for the debts and obligations of a corporation only to the extent of their
capital contributions.
 63

532. Limited liability company : A entity created under state law that is taxed like a
partnership (i.e., income and losses are passed through to the partners), but where
the liability of the owners is limited to their investment in the company. That is, they
can’t be held personally liable for the debts of the company.

533. Limited liability Partnership (LLP) : General partnership which, via registration with
an appropriate state authority, is able to enshroud all its partners in limited liability.
Rules governing llps vary significantly from state to state.

534. Line of credit : An agreement whereby a financial institution promises to lend up to a

certain amount without the need to file another loan application. The borrower is
required to reduce the debt whenever the limit of the full amount of credit has been
reached.

535. Liner : Ships having scheduled arrival and departure at the sea port are liners.

536. Linking method : Method for calculating rates of return that multiplies one plus the
interim rate of return.

537. Lintner’s observations : John Lintner’s work (1956) suggests that dividend policy is
related both a target level, and to the speed of adjustment of change in dividends.

538. Liquid : To be in a state of liquidity, i.e., Maintain sufficient assets in the form of cash
or assets easily convertible to cash to satisfy current liabilities. When speaking of
money or an economy; being very liquid means it is driven by primarily by cash,
checking/ saving accounts, treasury bills, stocks and bonds, etc; while being very
illiquid means it is driven primarily by human capital.

539. Liquid Assets: These assets also known as circulating, fluctuating or current assets.
These assets can be converted into cash as early as possible. Current assets are
cash bank balance, debtors, stock, investments.

540. Liquidation : The act of selling some or all positions to reduce or close out a
portfolio.

541. Liquidity : Quality of the asset by which it can be readily converted into cash.
 64

542. Listed : Refers to securities which are approved for trading on a recognized
exchange. Is a security or instrument which is traded on a recognized exchange.

543. Listed company : A public company listed or quoted on a stock exchange.

544. Listed firm : A company whose stock trades on a stock exchange, and conforms to
listing requirements.

545. Listed security : Stock or bond that has been accepted for trading by one of the
organized and registered securities exchanges in the United States. Generally, the
advantages of being listed are that exchanges provide : (1) an orderly marketplace;
(2) liquidity; (3) fair price determination; (4) accurate and continuous reporting on
sales and quotations; (5) information on listed companies; and (6) strict regulation for
the protection of security holders. Antithesis of OTC security.

546. Listing : In the context of real estate, written agreement between a property owner
and a real estate broker that gives the broker permission to find a buyer or tenant for
some property. listing broker in the context of equity, when a stock is traded in
exchange it is said to be listed.

547. Loading : The difference between the invoice price and the cost price is known as
loading. The means the amount of profit which is added to the cost in order to arrive
at the invoice price is called loading. Loading is to be calculated in the following way.

Loading = Invoice Price – Cost Price.

548. Local Expectations Hypothesis (LEH) : Theory that bonds similar in all aspects
except maturity will have the same holding-period rate of return.

549. Local expectations theory : A form of the pure expectations theory that suggests
that the returns on bonds of different maturities will be the same over a short-term
investment horizon.

550. Locational arbitrage : Attempt to exploit discrepancies in exchange rates between

banks.
 65

551. Lock : Used in the context of general equities. Make a market both ways (bid and
offer) either on the bid, offering, or an in-between price only. Locking on the offering
occurs to attract a seller, since the trader is willing to pay (and ask) the offering side
when others only ask it. Locking on the bid side attracts buyers for similar reasons.
Typically, the sell side requires a plus tick to comply with short sale rules.

552. Lock Price : Also known as Ex-works price, it means the ex-warehouse price of
goods. This price includes the cost of goods, packing costs and some normal profit.

553. Locked market : A market is locked if the bid price equals the ask price. This can
occur, for example, if the market is brokered and one side pays brokerage only, in
over-the-counter trading the initiator of the transaction. Highly competitive market
environment with inside bid and offering at the same price. Often occurs when an
OTC dealer has not updated the market.

554. Lock-out : With PAC bond CMO classes, the period before the PAC sinking fund
become effective. With multifamily loans, the period of time during which prepayment
is prohibited.

555. Lockup option : Often used in risk arbitrage. Privilege offered a white knight (friendly
acquirer) by a target company to buy crown jewels or additional equity. The aim is to
discourage a hostile takeover.

556. Logging : The practice of recording data, in some medium, sequential input, often in
a time-associated format.

557. Log-linear least-squares method : A statistical technique for fitting a curve to a set
of data points. One of the variables is transformed by taking its logarithm, and then a
straight line is fitted to the transformed set of data points.

558. Lognormal distribution : pattern of frequency of occurrence in which the logarithm

of the variable follows a normal distribution. Lognormal distributions are used to
describe returns calculated over periods of a year or more.

559. Lombard rate : Applies mainly to international equities. Interest rate the German
Bundesbank uses as an upper limit to the day-to-day money rate, since no bank will
 66

pay higher rates in the money market than it has to pay for very short-term recourse
to Lombard credit.

560. London Interbank Bid Rate (LIBID) : The bid rate that a Euromarket bank is willing
to pay to attract a deposit from another Euromarket bank in London.

561. London Interbank Offered Rate (LIBOR) : The rate that the most credit worthy
international banks that deal in eurodollars charge each other for large loans. It is
equivalent to the federal funds rate in the u.s.

562. London Stock Exchange (LSE) : The U.K.’s six regional exchanges joined together
in 1973 to form the stock exchange of Great Britain and Ireland, later named the LSE.
The FTSE 100 index (known as the footsie) is its dominant index.

563. Long coupon : Refers to the initial coupon for a municipal security which reflects
more than 6 months of accrued interest. The time of accrual is measure from the
start of the dated Date and continues until the end of the initial accrual period.

564. Long hedge : The purchase of a futures contract in anticipation of actual purchases
in the cash market. Used by processors or exporters as protection against an
advance in the cash price.

565. Long leg : The part of an option spread in which an agreement to buy the underlying
security is made.

566. Long run : A period of time in which all costs are variable; longer than one year.

567. Long-term funds : A mutual fund industry designation for all funds other than money
market funds. Long-term funds are broadly divided into equity (stock), bond, and
hybrid funds.

568. Long-term gain : A profit on the sale of a capital assets held longer than 12 months,
and eligible for long-term capital gains tax treatment.

569. Lookback option : An option that allows the buyer to choose as the option strike
price any price of the underlying asset that has occurred during the life of the option.
 67

For a call option, the buyer will choose the minimum price; for a put option, the buyer
will choose the maximum price. This option will always be in the money.

570. Losses: Losses may be capital or revenue losses. Revenue losses are deductible in
computing the profit in trading and profit and loss account. While Capital losses are to
be adjusted only in balance sheet.

571. Loss leader : A featured article of merchandise sold at a loss in order to draw
customers.

572. Loose Leaf Index : A method of filing using loose leaf binders.

573. Lots : In the context of general equities, this blocks or portions of trades. Can
express a specific transaction in a stock at a certain time, often implying execution at
the same price.

574. Low : In the context of general equities, this is a specific minimum limit required by a
seller in execution an order; implies a not-held limit order. Antithesis of top.

575. Low price-earnings ratio effect : The tendency of portfolios of stocks with a low
price-earnings ratio to outperform portfolios of stocks with high price-earnings ratios.

576. Lump sum : A price for a group of goods or services where there is no breakdown of
price for the various items.

577. Mail : Written communication passing through the post office or messenger.

578. Management accounting : The process of identification, measurement,

accumulation, analysis, preparation, interpretation, and communication of financial
information used by management to plan, evaluate, and control within an organization
and to assure appropriate use of and accountability for its resources. Management
accounting also comprises the preparation of financial reports for non-management
groups such as shareholders, creditors, regulatory agencies, and tax authorities.

579. Management buying : The acquisition of a controlling interest in a promising

business by an outside investment group that retains existing management and
places representatives on the board of directors.
 68

580. Management Information System (MIS) : A system which supplies information to

managers for decision making.

581. Management by Objectives (MBO) : A management theory that calls for managing
people based on documented work statements mutually agreed to by manager and
subordinate. Progress on these work statements is periodically reviewed, and in a
proper implementation compensation is usually tied to MBO performance.

582. Management control system : Essentially a strategic tool for holding managers
accountable and responsible for their performance. Existence of such a system also
provides feedback for managers to know how they perform, in which direction the
organization is heading, and what type of course correction may be required to stay
on course.

583. Management Discussion and Analysis (MD & A) : Usually seen in a financial
report. The information disclosed has been derived from analysis and discussions
held by the management (and is presented usually for the benefit of shareholders).

584. Managerial accounting : The process of identifying, measuring, analyzing,

interpreting and communicating information in pursuit of an organization’s goals.

585. Mandatory transfers : Transfers from the current fund group to other fund groups
arising out of binding legal agreements related to the financing, e.g., In education :
debt retirement, interest, and grant agreements with federal agencies and other
organizations to match gifts and grants. Whereas non-mandatory transfers would be
transfers from the current fund group to other fund groups made at the discretion of
management to serve various objectives, e.g., Additions to loan funds, endowment
funds, plant additions, and voluntary renewal and replacement of plant.

586. Manufacturing Account: It is the account prepared by an enterprise engaged in

manufacturing activities. It is prepared to find out the cost of goods manufactured.
This account will be closed by transferring its balance to the debit of the trading
account.

587. Manufacturing concerns: Manufacturing concerns are those business concerns

which are involved in manufacturing business. These concerns buy raw materials
 69

from the market are convert the same into finished goods, by applying certain
productive process. The final accounts of a manufacturing concern consists of
manufacturing account, trading and profit and loss account and balance sheet.

588. Margin : Allows investors to buy securities by borrowing money from a broker. The
margin is the difference between the market value of a stock and the loan a broker
makes.

589. Margin account : A leverageable account in which stocks can be purchased for a
combination of cash and a loan. The loan in the margin account is collateralized by
the stock; if the value of the stock drops sufficiently, the owner will be asked to either
put in more cash, or sell a portion of the stock. Margin rules are federally regulated,
but margin requirements and interest may vary among broker / dealers.

590. Marginal call : A demand for additional funds because of adverse price movement.
Maintenance margin requirement, security deposit maintenance.

591. Marginal lending : Margin lending is where the lender, usually a bank, will lend you
between approximately 40% and 70% of the value of approved shares and managed
funds. For example, if you have $30,000 in cash, you could borrow up to $70,000 and
buy a $1,00,000 portfolio. This portfolio then becomes the security for your margin
lending facility.

592. Margin of profit : Gross profit divided by net sales. Used to measure a firm’s
operating efficiency and pricing policies in order to determine how competitive the
firm is within the industry.

593. Margin of safety : With respect to working capital management, the difference
between (1) the amount of long-term financing and (2) the sum of fixed assets and
the permanent component of current assets.

594. Margin security : A security that may be bought or sold in a margin account.

595. Margin trading : Buying securities, in part, with borrowed money.

596. Marginal cost : A calculation showing the change in total cost as a result of a change
in volume, e.g. If one more item of output increases the total cost by $25, the
 70

marginal cost is $25. It is usually useful to determine marginal cost because it can aid
in determining if the rate of production should be altered.

597. Marginal efficiency of capital : The percentage yield earned on an additional unit of
capital.

598. Marginal profit : The change in the total profit that results from the sale of an
additional unit.

599. Marginal revenue : The change in total revenue as a result of producing one
additional dollars of taxable income earned.

600. Marginal utility : The change in total satisfaction as a result of consuming one
additional unit of a specific good or service.

601. Mark up or markup : Refers to the amount of spread or transaction fee added to a
security for sale by a dealer to a client. There are various guidelines provided by
regulatory and industry groups. Excessive mark ups are prohibited.

602. Market : An order to buy or sell an instrument at the prevailing price (bids and offers).
In the case of a buy order it means taking the offers whereas for a sell order it means
hitting the bids.

603. Market analysis : An analysis of technical corporate and market data used to predict
movement in the market.

604. Market capitalization : The total dollar value of all outstanding shares. It is
calculated by multiplying the number of shares times the current market price.

605. Market capitalization rate : Expected return on a security. The market-consensus

estimate of the appropriate discount rate for a firm’s cash flow.

606. Market cap or market capitalization : A value placed on a company. it is computed

by multiplying the number of outstanding shares by the current share price.
 71

607. Market clearing : Total demand for loans by borrowers equals total supply of loans
from lenders. The market, any market, clears at the equilibrium rate of interest or
price.

608. Market conversion price : Also called conversion parity price, the price that an
investor effectively pays for common stock by purchasing a convertible security and
then exercising the conversion option. This price is equal to the market price of
convertible security divided by the conversion ratio.

609. Market correction : A relatively short-term drop in stock market prices, generally
viewed as bringing overpriced stocks back to a level closer to companies’ actual
values.

610. Market efficiency hypotheses : Refer to theories which try to explain financial
market behaviour. Some hypotheses state that the markets are rigorously efficient
and operate by an immediate discounting of perfect information. Other theories state
that the markets are relatively inefficient, particularly when socially-oriented goals are
also to be considered. Other hypotheses state the information is good or even very
good but not perfect. Also, not all data or information. The latter theorists believe that
the markets try to attain pure efficiency. However, they also and this influences the
discounting and adoption processes. A simple example will highlight this view. While
improvements in technology are reducing costs and communication times, not
everyone updates their systems given each and every change in chip speeds and
processing power. To do so would be too expensive and this creates one of example
of a marketplace paradox.

611. Market failure : The inability of arm’s length markets to deliverer goods or services.
A multinational corporation’s market internalization advantages may take advantage
of market failure.

612. Market index : Market measure that consists of weighted values of the components
that make up certain list of companies. A stock market tracks the performance of
certain stocks by weighting them according to their prices and the number of
outstanding shares by a particular formula.

613. Market maker : In the over-the –counter market, a trader responsible for maintaining
an orderly market in an individual stock by standing ready to buy or sell shares. The
 72

market maker’s job is to maintain a firm bid and ask price for his assigned security. If
a broker wants to buy a stock but there are no offers to sell it, the market maker fills
the order himself by selling shares from his own account. And vice versa – if a broker
wants to sell but no one wants to buy, the market maker buys the shares. On a stock
exchange like AMEX or NYSE, a market maker is known as a specialist.

614. Market value : The value of an open position. It is determined by multiplying the
known or implied prevailing price by the quantity.

615. Market segmentation theory or preferred habitat theory : A biased expectations

theory that asserts that the shape of the yield curve is determined by the supply of
and demand for securities within each maturity sector.

616. Market share : The percentage of sales a company captures for a particular product
line, i.e., The percentage of total industry sales that a particular company controls
within a given market.

617. Market sweep : A second offering following a tender offer, allowing institutional
investors to obtain a controlling interest at a price higher than the original offer.

618. Market value : The price at which buyers and sellers trade similar items in an open
market place. In the absence of a market price, it is the estimated highest price a
buyer would be warranted in paying and a seller justified in accepting, provided both
parties were fully informed and acted intelligently and voluntarily.

619. Market value ratio : Ratios that relate the market price of the firm’s common stock to
selected financial statement items.

620. Market value-weighted index : An index of a group of securities computed by

calculating a weighted average of the returns on each security in index, where the
weights are proportional to outstanding market value.

621. Marketability : A negotiable security is said to have good marketability if there is an

active secondary market in which it can easily be resold.
 73

622. Marketable security : A readily tradable equity or debt security with quoted prices; to
include commercial paper and treasury bills. It is a “close to cash” asset which is
classified as a current asset.

623. Market-book ratio : Market price of a share divided by book value per share.

624. Markowitz efficient frontier : The graphical depiction of the Markowitz efficient set
of portfolios representing the boundary of the set of feasible portfolios that have the
maximum return for a given level of risk. Any portfolios above the frontier cannot be
achieved. Any below the frontier are dominated by Markowitz efficient portfolios.

625. Marshalling: The order in which the various assets and liabilities are arranged in the
Balance Sheet is known as marshalling. The assets and liabilities are arranged in two
ways in the balance sheet viz., (a) In order of liability (b) In order of permanence.

626. Matching : The matching of invoices to purchase orders and delivery notes prior to
payment.

627. Matching Cost Concept: According to this principle, the expenses incurred in an
accounting period should be matched with the revenues recognised on all goods sold
during a period, cost of those goods sold should also be charged to that period.

628. Matching principle : A fundamental concept of basic accounting. In any one given
accounting period, you should try to match the revenue you are reporting with the
expenses it book to generate that revenue in the same time period, or over the
periods in which you will be receiving benefits from that expenditure.

629. Mate’s Receipt : It is issued by the captain of the ship of the exporter or the
forwarding agent on the receipt of goods on the ship for transportation to another
country. It may be a clean receipt or a foul receipt.

630. Mathematical programming : An operations research technique that solves

problems in which an option value is sought subject to specified constraints.
Mathematical programming models include linear programming, quadratic
programming, and dynamic programming.
 74

631. Matrix organization : Where a company superimposes a group or interdisciplinary

team of project specialists on a functional organizational design. In a matrix
organization the members have dual allegiances, i.e., To that particular assignment
or project as well as their normal organizational department.

632. Matrix trading : Swapping bonds in order to take advantages of temporary

differences in the yield spread between bonds with different ratings or different
classes.

633. Maturity date : The date on which a payment becomes due at the end of the term of
an endowing policy or a fixed term security or loan.

634. Maturity value : The amount payable to the insured at the maturity date of an
endowment policy.

635. MBSCC : The Mortgage Back Securities Clearing Corporation.

636. Mean reversion : The postulate that short term rates or volatility’s will move toward
longer term averages.

637. Melt down or meltdown : A sudden decline or collapse in financial values. Tends to
be used for broader indicators such as market indices or asset classes.

638. Measurement theory : Measurement theory involves the assignment of numerals to

objects or events in order to represent certain attributes, or properties, of those
objects and events.

639. Mechanic’s lien : A claim in favor of mechanics, contractors, laborers or material

suppliers against a building or other structure. The lien can only be filed by persons
who worked on the building or supplied materials.

640. Median : The value of the midpoint variable when the data are arranged in ascending
or descending order.

641. Merchandising : The delivery aspect of the futures market. It is secondary to the risk
management role of the futures and options market. Merchandising occurs when a
 75

hedger delivers commodities or financials. Sometimes, this technique is used for the
hedger to maintain anonymity.

642. Merchant banking : A form of banking where the bank arranges credit financing, but
doesn’t hold loans until maturity. A merchant bank invests its own capital in leveraged
buyouts, corporate acquisitions and other structured financial transactions. It is a fee-
based business, in which the bank assumes market risk but no long-term credit risk.

643. Merger : The formation of one company from two or more previously existing
companies through pooling of common stock, cash payment or a combination of both.
Mergers where common stock is exchanged for common stock are nontaxable and
are called tax-free mergers.

644. Methods of Calculation of Interest : The methods are : (I) Interest Table Method (ii)
Product Method; (iii) Interest Numbers Method (iv) Periodic Balance Method.

645. Microfiling : A method of copying records on safety base films.

646. Modigliani and miller proposition I : A proposition by Modigliani and Miller which
states what a firm cannot change the total value of its outstanding securities by
changing its capital structure proportions. Also called the irrelevance proposition.

647. Modigliani and miller proposition II : A proposition by Modigliani and Miller which
states that the cost of equity is a linear function of the firm’s debt / equity-ratio.

648. Monetary measurement : The idea that money, as the common medium of
exchange, is the accounting unit of measurement, and that only economic activities
measurable in monetary terms are included in the accounting model.

649. Monetary market : Money markets are for borrowing and lending money for three
years or less. The securities in a money market can be U.S. government bonds,
Treasury bills and commercial paper from banks and companies.

650. Monetary policy : The regulation of the money supply and interest rates by a central
bank, such as the U.S. Federal Reserve, in order to control inflation and stabilize
currency. If the economy is heating up, the Fed can withdraw money from the
banking system, raise the reserve requirement or raise the discount rate to make it
 76

cool down. If growth is slowing, the Fed can reverse the process – increase the
money supply, lower the reserve requirement and decrease the discount rate.

651. Money : Anything that is generally acceptable as a means of exchange. At the same
time it acts as a measure and store of value.

652. Money supply : Total stock of money in the economy, consisting primarily of
currency in circulation and deposits in savings and checking accounts. Too much
money in relation to the output of goods tends to push interest rates down and push
inflation up; too little money tends to push rates up and prices down, causing
unemployment and idle plant capacity. The Federal Reserve manages the money
supply by raising and lowering the reserves banks are required to hold and the
discount rate at which they can borrow money from the Fed. The Fed also trades
government securities (called repurchase agreements) to take money out of the
system or put it in. there are various measures of money supply, including M1, M2,
M3 and L; these are referred to as monetary aggregates.

653. Money market security : Short-term investment usually of less than one year.

654. Money Measurement Concept: The business transactions are not recorded in terms
of Kilograms, quintals, meteres, litres etc. They will be recorded in a common
denomination. It is mainly to see that they become homogeneous and meaningful.
Money does this function. It is adopted as the common measuring unit. So, all
recording is done in terms of standard currency of the country where the business is
set up. Therefore, only those transactions and event which can be expressed in terms
of money are recorded in the books of accounts.

655. Monopoly : Absolute control of all sales and distribution in a market by one firm, due
to some barrier to entry of other firms, allowing the firm to sell at a higher price than
the socially optimal price.

656. Monopsony : The existence of only one buyer in a market, forcing sellers to accept a
lower price than the socially optimal price.
 77

657. Mortgage : A loan used to buy your house, where your house is used as security
until you’ve paid off the loan (usually after a fixed period). There are three main types
of mortgage.
- A repayment mortgage – you pay off the loan by installments of capital and
interest so that after the agreed period you have paid off all the loan
- An interest only mortgage – you pay only interest on mortgage and make other
arrangements to repay the capital, like an endowment policy.
- A flexible mortgage allows you to make overpayments and take payment
holidays.

658. Mortgage note : An instrument used to encumber land as security for a debt. This
document gives the mortgage company “in term” jurisdiction over the mortgagor.

659. Multiplier : A factor within can increase the leverage of an instrument such as a
floater or inverse floater. While sometimes the multiplier is less than 1.0, it is usually
greater than 1.0. multipliers are often seen in structured financings such as CMOs
and Over-the –Counter derivatives.

660. Mutual fund : An investment company which the number of shares outstanding
varies according to demand. If investors seek to own more shares, the fund wills ell
new ones. If existing shareholders seek to reduce their holdings then the fund will
purchase them at the Net Asset Value. In recent years, there have been new
provisions which can slow down the redemption process. It had been the case that
fund shares were to be redeemed immediately on demand. This type of investment
company is also known as an Open End Fund because the number of shares
outstanding can vary widely from day-to-day.

661. Moving average : A perpetual inventory cost flow alternative whereby the cost of
goods sold and the cost of ending inventory are determined by using a weighted-
average cost of all merchandise on hand after each purchase.

662. Mutual agency : The right of all partners in a partnership to act as agents for the
normal business operations of the partnership, with the authority to bind it to business
agreements.

663. Mutual fund theorem : A result associated with the CAPM, asserting that investors
will choose to invest their entire risky portfolio in market-index or mutual fund.
 78

664. Naked option : An open option position which is not covered or hedged. Frequently,
it is used in the context of a sold option position.

665. Narration: Narration means brief explanation of the entry. Every jounrnal entry must
be followed by narration. Important details, calculations, respective documents and
resolutions, if any will be mentioned in the narration. Narration is written under the
journal entry in particulars column. It is to be written in one or two lines.

666. Nasdaq small-capitalization companies : A group of 2000 companies with

relatively small capitalization, which are listed separately and have at least two
market makers.

667. Negative working Capital : Occurs when current liabilities exceed current assets,
which can lead to bankruptcy.

668. Negotiable instrument : A written document, the title of which can be transferred tot
he thrid party for valuable consideration. The negotiable instruments are : Bills of
Exchange, promissory note and cheque.

669. Net adjusted present value : The adjusted present value minus the initial cost of an
investment.

670. Net Asset Value (NAV) : Refers to the value of a share or unit of investment. It is
computed by adjusting the market value of all investments by the liabilities. Then this
net dollar amount is divided by the number of shares or units outstanding. Unless
there are additional charges to be imposed upon redemption, the Net Asset Value
becomes the bid and transaction market price. Most open end funds only calculate
transactional net asset values once a day based on the closing and settlement prices.

671. Net capital requirement : SEC requirement that member firms and nonmember
securities broker-dealers maintain a maximum ratio of indebtedness to liquid capital
of 15 to 1.

672. Net capitalized cost : In leasing, it’s the price of the vehicle after deducting
manufacturer’s discounts, dealer participation allowances, and cap cost reduction
(down payment) from the manufacturer's suggested retail price.
 79

673. Net cash flow : Equals cash receipts minus cash payments over a given period of
time; or equivalently, net profit plus amounts charged off for depreciation, depletion,
and amortization. Also called cash flow. Net cash flow is a measure of a company’s
financial health.

674. Net coupon : The coupon or interest payment made to the investor of a mortgage
backed security. It is lower than the gross coupon of the collateral by an amount
equal to the servicing, guarantee, and other applicable fees.

675. Net current assets : The difference between current assets and current liabilities,
also known as working capital.

676. Net Income : Also known as the bottom line, this is the profit a company realizes
after all costs, expenses and taxes have been paid. It is calculated by subtracting
business, depreciation, interest and tax costs from revenues. Investors often pay too
much attention to net income, the calculation of which can be easily manipulated by
accountants. A better measure of corporate growth, some analysts say, is cash flow.
Net income is also called earnings or net profit.

677. Net Present Value (NPV) : A method used in evaluating investments, whereby the
net present value of all cash outflows and cash inflows is calculated using a given
discount rate. An investment is acceptable if the NPV is positive. In capital budgeting,
the discount rate used is called the hurdle rate and is usually equal to the incremental
cost of capital.

678. Net Profit / Loss: Net profit can be defined as an excess of total revenues of the
business over the total expenses of the business. If the total expenses are more than
the total revenues, it results in net loss. Net profit / Loss will be transferred to capital
account.

679. Net margin : A company’s profitability after all costs, expenses and taxes have been
paid. The net margin is calculated by dividing net earnings by revenue and them
multiplying by 100. The result is expressed as a percentage. Net margin is used to
measure operating efficiency at a company. It is the one of profit margin investors
watch most closely because it takes into account all expenses of running the
company. But operating margins may paint a truer picture of a company’s profitability.
 80

680. Net Present value : One of the building block processes for finance. It provides a
methodology for evaluating and pricing securities and projects. In a simple case it is
the discount mechanism for a zero coupon security. Here, there is one payment
predicated either on interest or principal. By knowing the time left to maturity,
assuming no option features, and knowing the discount rate, one can price or
evaluate the zero coupon. Pricing bonds is an extension of this process. Now, instead
of evaluating, one payment, there is an entire interest and principal payment stream.
For equities, the process evaluates expected cash or dividend flows and the residual
value of the enterprise. Complexity arises when there are multiple discount rates
(bids and offers), yield curve shapes, and credit differences. Even the selection of
discrete, compounding or accretion modeling can make a substantial impact on the
value of a simple zero coupon bond.

681. Net worth : The amount by which total assets exceed total liabilities. Also known as
shareholder’s equity or book value, net worth is what would be left over for
shareholders if the company were sold and its debt retired. It takes into account all
money invested in the company since its founding, as well as retained earnings.
Examining the price-to-book ratio (P/B) of an industrial company with a lot of hard
assets is a good way of telling if it’s undervalued or overvalued.

682. Net working capital : Current assets minus current liabilities. Often simply referred
to as working capital.

683. Net worth : Common stockholders’ equity which consists of common stock, surplus,
and retained earnings.

684. Netting : A process used by institutions and clearing houses to determine the
marginal risks and demands for funds.

685. Noah effect : The tendency of persistent time series to have abrupt, and
discontinuous changes. The normal distribution assumes continuous changes in a
system. However, a time series which exhibits Hurst statistics may abruptly change
levels, skipping values either up or down. Mandelbrot coined the term “Noah effect”
after the biblical story of the deluge.
 81

686. Nominal Accounts: Accounts relating to expenses, losses, incomes and gains are
known as ‘Nominal Accounts’. A separate account is maintained for each item of
expenses, loss, income or gain. Wages account, salaries account, commission
received account, and Interest received account are some examples of nominal
accounts.

687. Noncash items : Items included in the determination of net income on an accrual
basis that do not affect cash; examples are depreciation and amortization.

688. Noncash transactions : Investing and financing activities that do not affect cash; if
significant, they are disclosed below the statement of cash flows or in the notes to the
financial statements.

689. Non-recurring Expenses : All the expenses incurred for bringing goods to the
godown of the consignee are non-recurring in nature. Such expenses are generally
incurred on the consignment as a whole. The non-recurring expenses will be incurred
partly by the consignor and partly by the consignee, Ex : Packing, Carriage,
unloading charges etc.

690. Non-trading concerns : They are the organizations not engaged in any business
activity. They are established for promoting of art, music, culture, education etc. They
may also be established for charitable and social purposes. Hospitals, educational
institutions, cultural organizations, religions and welfare institutions, clubs, libraries,
literary societies etc., come under these non-trading organizations. Their main aim is
not to earn profit, but rendering services to their members and to the general public.
As such, they are also called as Non-trading Concerns or non-profit
organizations.

691. Noting Charges : Charges paid to the Notary Public who gives a certificate indicating
dishonour of a bill.

692. Notary Public : A person authorized by the Government for recording the fact of
dishonour (noting) in respect of the bill.

693. Normal Loss : Normal loss arises due to natural causes such as evaporating, drying,
breaking etc. Such losses cannot be avoided inspite of best efforts. For example,
coal, cement etc., when transported, to some extent lose their weights. In such cases
 82

the total cost of goods shall be suitably inflated so as to absorb the losses. The
question of normal loss assumes importance in valuing closing stock. The following
formula can be applied for this purpose.
Value of Closing Stock = Value of goods sent x Quantity in stock
-------------------------------------------------
Net quantity received by the consignee

694. Normal Profits : Amount of profits expected on the basis of the normal rate of return.

695. Obsolescence : Obsolescence refers to the decrease in usefulness arising on

account of the external factors like change in technology, new inventions, change of
style etc.

696. Office : An office may be regarded as a place where the control mechanism of an
organization is located.

697. Ombudsman : An independent official to whom grievances can be aired, free of

charge. Ombudsman is a Swedish word meaning citizen’s representative. The
Insurance Ombudsman Bureau aims to increase confidence in Insurance by offering
an independent resource for resolving disputes between insurance companies and
their customers.

698. One-sided errors : An error which affects the debit or credit side of one account
only.

699. Opening Entries: When the old books are closed and the new books are opened for
the new year, we have to write the opening entries in the new books. While doing so
the balances of personal and real accounts of old books are recorded the new year
on the first day in new books.

700. Operating income : A measure of a company’s earning power from ongoing

operations, equal to earnings before deduction of interest payment and income taxes.
Operating income is calculated by subtracting costs of sales and operating expenses
from revenues. It is often used to gauge the financial performance of companies with
high levels of debt and interest expenses. Also called operating profit or EBIT
(earnings before interest and taxes).
 83

701. Operating margin : A company’s profitability after all operating costs have been
paid. Operating margin is calculated by dividing cash flow by revenue and then
multiplying by 100. The result is expressed as a percentage. Operating margin shows
you how profitable a company is before interest expenses on debt and depreciation
costs have been deducted. Since accountants often manipulate depreciation and
amortization costs on income statements, many analysts feel operating profit paints a
truer picture of a company’s profitability.

702. Option : An agreement that gives an investor the right, but not the obligation, to buy
or sell a stock, bond or commodity at a specified price within a specific time period. A
call option is an option to buy the security; a put option is an expiration date, all
monies paid for the option are forfeited. Options are traded on several exchanges,
including the Chicago Board of Options Exchange, The American Stock Exchange,
the Philadelphia Stock Exchange, the Pacific Stock Exchange and the New York
Stock Exchange.

703. Outstanding expenses: Expenses that are incurred during the current year but their
payment is not made in the same year. Example, outstanding salaries, office rent etc.

704. Over the Counter (OTC) : The Market place where securities are not listed on an
exchange. Many derivatives, fixed income securities, and very small capitalization
stocks belong in this group. Another notable difference between Over the Counter
instruments and listed securities is that OTC instruments tend to be customized
whereas listed instruments are standardized.

705. Overdraft: When a customer of a bank obtains the facility of drawing from his current
account more account than his deposit. It is called overdraft. In case of overdraft, the
pass book shows debit balance.

706. Over-riding Commission : It is the commission over and above the normal
commission paid to the consignee for extra services provided by him or excess price
realized by him or to introduce a new product into the market.

707. Over-the-counter market : A market in which securities transactions are conducted

by dealers through a telephone and computer network connection dealers in stocks
and bonds. Also called OTC trading.
 84

708. Paper Money : Money which has no intrinsic value. But it is accepted as money due
to its general acceptance and quality of scarcity.

709. Par Value : The nominal dollar amount assigned to a bond by its issuer. Par value
represents the amount of principal you are owed at a bond’s maturity. The bond’s
actual market value may be higher or lower. When a bond’s market price fluctuates, it
has an impact on its yield. If the price drops below the bond’s par value, its yield goes
up. If the price rises above par value, the yield goes down. Also called face value.

710. Partner’s Current Account : An account prepared (under fixed capitals method) for
recording all transactions relating to a partner other than the capital brought by him.

711. Partnership Deed : A document which contains the terms of partnership as agreed
among the partners.

712. Partnership Firm : A business unit owned by two or more persons under an
agreement to share profit of the business carried on by all or any of them acting for
all.

713. Pass Book: When a person opens an account in the bank, the banker maintains a
book in the name of the depositor to record all the deposits and withdrawals of the
depositor. This book is called “Bank Pass Book”. The banker supplies the copy of the
pass book to the customer. The transactions in the pass book will be entered only by
the bank staff.

714. Pay out ratio : The percentage of a company’s earnings paid to shareholders as
dividends. It is calculated by dividing the quarterly dividend by the quarterly earnings-
per-share and multiplying by 100. Typically, growth companies retain earnings to spur
further growth, while old-line companies, banks and utilities tend to have higher
payout ratios.

715. Payee : A person who has the right to receive the payment against the bill.

716. Personal Accounts: Accounts which show transactions with persons are called
‘Personal Accounts’. A separate account is kept in the name of each person for
recording the benefits received from, or given to the person in the course of dealings
with him. Examples are: Krishna ‘s Account, Gopal ‘s Account, Kalyan ‘s Loan
 85

Account etc. Personal Accounts also include accounts in the names of firms,
companies or institutions such as Malini & Sons Account, Nagarjuna Finance
Company Limited Account.

717. Petty Cash Book: In every business, there are so many payments of small nature
like rickshaw charges, coolie charges, stamps and telegrams, stationery etc. Inclusion
of all these petty expenses will make the cash book unnecessarily bulky. Moreover,
inclusion of a large number of items will invite error into the cash book. Hence, to
record all such day to day small expenses, a separate book is maintained known as
Petty Cash Book. The person in charge of that book is known as “Petty Cashier”.

718. Portability : All the interest rates in this range are portable. This means that if you
move home during the discounted or fixed rate period, you can enjoy the same rate,
on the amount outstanding on your original loan, for the remainder of the discounted
or fixed rate period. Conditions apply – please ask for details.

719. Portfolio : A collection of securities held by an investor. Portfolios tend to consist of a

variety of securities in order to minimize investment risk.

720. Portfolio analysis : The methodology which quantified systematic and

nonsystematic risk for investment holdings. Harry Markowitz is considered the
primary influence in this field.

721. Portfolio theory : Evaluates the reduction of nonsystematic or diversifiable risks

through the selection of securities or other instruments into a composite holding or
efficient portfolio. This efficiency means that a portfolio would offer lower risks or
more stable returns for a targeted return level. Instruments that have independent
returns lower nonsystematic risks. Also, instruments that are inversely related on a
return basis reduce the diversifiable risks. The basic theory assumes that returns are
independent, investor expectations are homogeneous, and that the normalized
probability distributions are stable.

722. Posting: Posting is the process of entering in the ledger the entries given in the
journal. Posting into ledger is done periodically. It may be done weekly or fortnightly
as per the convenience of the business. After the completion of journal entry only
posting is to be made into the ledger. For each item in the journal a separate account
is to be opened. For each account there must be a name. This should be written on
 86

the top of the account in the middle. The debit side of the journal entry is posted to
the debit side of the account by starting with ‘To’. The credit side of the journal entry
is posted on the credit side of the account by starting with ‘By’.

723. Power Grid : A matrix which enables an analyst, investor, portfolio or risk manager a
quick and incisive look at the option characteristics of a group of countries or
corporations. In the case of countries, such as the G-7, the equity; credit and
currency markets are comparable in terms of standardized statistics such as volatility.
This tool helps to identify imbalances and potential arbitrage situations.

724. Preferred Stock : An equity security which has a priority relative to ordinary common
shares for dividends and return of par amount in the event of a corporate dissolution.
Often, a default in the payment of that issue’s preferred dividend or other convenant
breach may temporarily give the preferred holders voting powers. Preferred shares
can have convertible, cumulative, participating, voting, or other special features.

725. Prepaid expenses: Expenses relating to the future years but paid in the current year
itself. There are several items of expenses which are paid in advance in the normal
course of business operations. These expenses are also known as “Unexpired
expenses”. The example of a such expenses paid in advance generally are insurance
premium, rent etc.

726. Premium : Amount paid by an incoming partner to compensate the old partners for
their loss of share in future profits of the firm. It is equal to his share of goodwill.

727. Price-to-earnings ratio (P/E) : A ratio of evaluate a stock’s worth. It is calculated by

dividing the stock’s price by an earnings- per share figure. If calculated with the past
year’s earnings, it is called a forward P/ companies sometimes “manage” their
earnings with accounting wizardry to make them look better than they really are.
That’s why some analysts prefer to focus on the price-to-cash flow measure instead.

728. Price-to-earnings-growth ratio (PEG) : The PEG ratio (Price-to-earnings-growth) is

calculated by dividing a stock’s forward P/E by its projected three – to five-year
annual earnings-per-share growth rate. It is used to find companies that are trading at
a discount to their projected growth. A PEG ratio of less than one is considered a sign
that a stock is a good value. Generally speaking, the higher the PEG, the pricier the
stock.
 87

729. Prime rate : The interest rate banks charge their most credit worthy commercial
customers. Banks use the prime as a base to set rates for credit cards, home-equity
loans and other loans, including loans to small and medium-size businesses. The rate
is determined by general trends in interest rates. As rates decline, the prime rate will
also move lower. However, it doesn’t typically move on a day-by-day basis. Prime
rate changes are usually led by major money center banks. Normally, the prime rate
will move in steps and then remain constant until a major rate change has been
made. This usually happens when the Federal Reserve makes major changes in
monetary policy.

730. Principal : The face value or par value of a bond. It represents the amount of money
you are owed when a bond reaches its maturity. So if you buy a 10-year Treasury
note with a 5% coupon rate and a $1,000 face value, $1,000 is the principal owed to
you in 10 years.

731. Private Automatic Branch Exchange (PABX) : All incoming calls are put through by
the operator. For outgoing calls, an executive can go through the operator. If PABX
system is operated electronically it is called EPABX (Electronic Private Automatic
Branch Exchange).

732. Private Branch Exchange (PBX) : Here the internal telephone extensions may be
brought together on a private switchboard. It is connected with central telephone
exchange by two or more lines.

733. Private Carrier : Firms that own and operate their own vehicles for the movement of
their own goods.

734. Private warehouse : These are the warehouses generally owned by large business
houses for the storage of their own stock.

735. Product : The amount arrived at by multiplying the amount on the bill with the
number of days from the starting date.

736. Profit and Loss Appropriation Account : An account prepared for distribution of
profit or loss of the firm among the partners.
 88

737. Promissory Note : A Promissory Note is an instrument in writing (not being bank
note or currency note), containing an unconditional undertaking signed by the maker
to pay a certain sum of money only to or to the order, of a certain person or to the
bearer of the instrument.

738. Pro rata premium : A rate charged for a period of insurance cover shorter than the
normal period. For example, if an insured had cover for one quarter of a year, the Pro
Rata premium might be only one quarter of the annual premium.

739. Profit : The earnings a company realizes after all costs, expenses and taxes have
been paid. It is calculated by subtracting business, depreciation, interest and tax
costs from revenues. Profit is the supreme measure of value as far as the market is
concerned. Profit is also called earnings or net income.

740. Profit and Loss Account: Profit and Loss Account is the second part of trading and
profit and loss account. It is prepared to calculate the net profit or net loss of the
business. In the debit side of the P & L account all the revenue expenditures and
recorded. The credit side of the P & L account shows all the revenue incomes.

741. Profit and Loss Appropriation Account : An account prepared for distribution of
profit or loss of the firm among the partners.

742. Profit margin : A measure of a company’s profitability, cost structure and efficiency,
calculated by dividing earnings or cash flow by revenue. There are four basic types of
profit margin : gross, operating, pre-tax and net. Net margin is the one investors pay
the most attention to. It shows a company’s profitability after all costs, expenses and
taxes have been paid. The net margin is calculated by dividing earnings by revenue
and then multiplying by 100. Margins are particulars helpful since they an be used
both the compare profitability among many companies and to look for financial trouble
at a single outfit.

743. Proforma Invoice : Proforma Invoice is a statement of the goods sent by the
consignor to consignee. It contains the description of the goods consigned, weight,
quantity etc. The price at which the goods are to be sold will be given. The consignee
has to sell the goods at the Proforma Invoice Price or at a price above that. But he
cannot sell below that price without obtaining consent from the consignor.
 89

744. Prospectus : A formal, written offer to sell securities that sets forth the plan for a
proposed or existing business. The prospectus must be filed with the Securities and
Exchange Commission and given to prospective buyers. A prospectus includes
information on a company’s finances, risks, products, services and management.
Prospectuses are also used by mutual funds to describe the fund objectives, risks,
fees and other essential information.

745. Provision for Discount on Debtors: When the goods are sold on credit and the
payment may be made after a fixed period. But if the party pays it early, the trader
allows some discount. Such discount will be an anticipated loss for business and
must be provided in accounts. Hence, provision for discount is calculated on the
debtors. It is shown on the debit side of the profit and loss account and on the assets
side of the balance sheet by way of deduction from the amount of debtors. When a
discount is allowed, it is deducted form the provision for discount account.

746. Provision for Discount Creditors: Creditors, generally, allow a cash discount for
making prompt payments so that the expected gain on account of discount receivable
from the creditors in the next year is taken into account. Such a provision is called
provision for discount on creditors. Discount on provision of creditors is shown on the
credit side of the profit and loss account and it is shown as a deduction from sundry
creditors on the liabilities side of the balance Sheet.

747. Proxy : A Proxy is the authorization or power of attorney, signed by a stock holder
assigning the right to vote their shares to another party. A company’s management
mails proxy statements to registered stockholders prior to the annual shareholder
meetings. The statement contains a brief explanation of proposed management-
sponsored voting items, along with the opportunity to vote for or against each
individual issue or transfer the right to vote to company management or another
party.

748. Public company : A company that sells shares of its stock to the public. Public
companies are regulated by the Securities and Exchange Commission (SEC). Also
called a publicly held company.

749. Public warehouses : These are the warehouses owned by port trusts, the
Government, wharfingers or any member of the public.
 90

750. Purchases Book: This book records all credit purchases only. Purchase of goods for
cash will not be recorded in this book. In the same way, purchase of assets for cash
or credit also do not appear in this book. The purchases book will be totaled
periodically. It will be posted to the debit side of the purchases account.

751. Purchase Returns Book: This book is also known as Returns Outward Book. This
book is used to record the particulars of goods returned to the supplier. This book
helps in knowing about the amount of goods returned to the suppliers.

752. Quick Assets : Refer to current assets which are readily convertible into cash. These
quick assets are often defined as current assets minus inventory values.

753. Quick asset ratio : Refers to the ratio of cash, cash equivalents and accounts
receivable relative to the total current liabilities. It is also known as the Acid Test
Ratio. This measure of liquidity is more rigorous than the Current Ratio.

754. Quotation : The illustration provided to show the costs of insurance cover. The
quotation document forms the basis of a new contract or the renewal of an existing
one. It contains details of the conditions, benefits, caveats and premiums for the
policy.

755. Railway Receipt (R / R) : It is the document of agreement between the sender of

goods and the railways for transporting the specific goods from one railway sttion to
other railway station.

756. Random : A condition in finance or economics whereby changes occur on a

probabilistic basis. The underlying probability function may be known or unknown.

757. Random walk : The financial theory that asserts that changes in price or rate time
series are unpredictable. However, the theory recognizes that there is a statistical
interdependency between the data. The non-random stickiness is sometimes referred
to as autocorrelation or serial correlation.

758. Range : The difference between the high and the low for a time series for a stated
period. For example, it can refer to the daily, weekly, monthly, yearly or lifetime range
in prices, interest rates or other economic indicator.
 91

759. RAROC : Refers to the Risk Adjusted Return on Capital.

760. Real Accounts: Accounts relating to properties or assets are known as ‘Real
Accounts’. Every business needs assets such as machinery, furniture etc., for running
its activities. A separate account is maintained for each asset owned by the business.
All transactions relating to a particular asset are recorded in the concerned asset
account. Cash account, Furniture account, Machinery account, Building Account etc.,
are some examples of real accounts.

761. Rebate : The discount allowed to the drawee for early payment of the bill.

762. Receipts and Payments account : It is a summary of cash transactions at the end
of a particular period. It is prepared by Non-trading concerns. It shows the receipts
and payments of cash during the period. It is a real account. It starts with the opening
balance of cash in hand and at bank. All receipts and payments of cash are entered
in this book. The balance in this account shows closing balance of cash or bank.

763. Rectification Entries: While recording the transactions in the books the accountant
may do some mistakes. Any such errors committed should be rectified. It will be done
by passing rectification entries.

764. Recurring Expenses : These expenses are incurred after the goods have reached
the consignee’s place or godown. They are recurring in nature because they may be
incurred repeated by the consignor and consignee. Ex : Bank charges, Godown
charges, insurance etc.

765. Red Ink Interest : In case the due date of a bill falls after the date of closing the
account, then no interest is allowed for that. However, interest from the date of
closing to such due date is written in ‘Red Ink’ in the appropriate side of the ‘Current
Account’. This interest is called Red-Ink Interest. This Red Ink Interest is treated as
negative interest.

766. Redemption : For all our mortgages, if you pay off the whole or any part of the loan
before the end of the mortgage term, you will have to pay a redemption charge. This
will be the amount specific to the mortgage product specified on the relevant Web
page and in our brochures. There will also be an Administration fee at redemption. If
you decide to redeem your Standard Variable Rate mortgage, you would only pay an
 92

administration fee. Fees applied in addition to any interest charges at the time the
mortgage is redeemed are charged to cover our reasonable administration costs.
These include retrieving and checking the Deeds and Documents, formal sealing,
recording of documents sealed and secure postage.

767. Regional Rural Banks : These are the banks set up in rural areas. They are meant
for serving agricultural needs along with needs of rural people. Ex : Chaitanya
Grameena Bank.

768. Repo rate : The rate on securities repurchase agreements used by central banks to
influence domestic money markets.

769. Repos : Repurchase Agreements.

770. Repossession : This is when a borrower fails to pay back their loan in accordance
with the Terms ad Conditions of that loan and the lender exercises their legal charge
over the borrower’s property by taking legal ownership.

771. Renewal of Bill : It means the cancellation of the old bill before due date and
drawing a new bill in its place.

772. Reserve for bad and doubtful debts: In every business it is certain that some
portion of debt will not be recovered. This amount is written off as bad debts. It is also
likely that some of the remaining debts may not be recovered in full. Hence, an
attempt is made to maintain a provision to recover the loss of anticipated bad debts at
the time of p reparation of final accounts. This provision is known as Provision for bad
and doubtful debts.

773. Return of Assets (ROA) : The rate of investment return a company earns on its
assets. An indicator of profitability, ROA is determined by dividing net income from
the past 12 months by total assets and then multiplying by 100. Within a specific
industry, ROA can be used to compare how efficient a company is relative to its
competitors. Unlike return on equity, ROA ignores a company’s liabilities.

774. Return on equity : The rate of investment return a company earns on shareholders’
equity. An indicator of profitability, ROE is determined by dividing net income from the
past 12 months by net worth (or book value). This statistic shows how effectively a
 93

company is using its investors’ money. Within a specific industry, it can be used to
compare how efficient a company is relative to its competitors.

775. Return on Investment : A measure of how much the company earns on the money
the company itself has invested. It is calculated by dividing the company’s net income
by its net assets.

776. Reinsurance : It is sub-insurance made by the main insurer in case he finds himself
incapable to compensate for the loss.

777. Residual Value Or Scrap Value : This is expected realisable amount, when the
asset is sold out at the end of its useful life. The scrap value depends upon the usage
of the asset, its obsolescence and loss due to destruction.

778. Revaluation Account / Profit and Loss Adjustment a/c : Whenever there is a new
admission or retirement of partners, an account known as Revaluation Account will
be prepared. The adjustment in the value of assets and liabilities are effected through
an account. It is called Profit and Loss Adjustment Account. The preparation of
this account helps us in finding out the profit or loss on the revaluation of
assets and liabilities of the firm. Ultimately, the profit or loss on revaluation will
be transferred to the capital accounts of the partners.

779. Revenue : Revenue is the earnings of a company before any costs or expenses are
deducted. It includes all net sales of the company plus any other revenue associated
with the main operations of the business. It does not include dividends, interest
income or non-operating income. Also called net sales.

780. Revenue Receipts: Amounts received by sale of goods or services are known as
revenue receipts. These receipts will recur continuously. For example, Receipts by
sale of goods or services; Receipt of Interest, Dividend, Commission, Discount etc.
All revenue receipts are to be shown in the credit side of trading, profit and loss
account.

781. Revenue Expenditure: Expenses incurred in day – to – day running of business is

known as revenue expenditure. For example, wages, salaries, other office expenses,
selling, distribution expenses etc. All revenue expenses are to be shown in the debit
side of the trading and profit and loss account.
 94

782. Reverse Repos : Reverse Repurchase Agreements. Depending on the context, they
may be called Matched Sales.

783. Risk arbitrage : A form of trading whereby the risk arbitrageur attempts to profit from
issues involved in merger/ acquisitions. The underlying rationale is that the current
price after the announcement is still below the bid price. Also, the company may find
itself subject to other bids for its stock in excess of the initial announced bid. These
price differentials are the arbitrage part. The risk is that other bids do not materialize
or the initial announcement fails due to other considerations.

784. Sacred cow : An asset, position, or project which is considered protected by

management. Often this investment is presented as “off-limits” or non-negotiable.

785. Sacrificing Ratio : Ratio in which the old partners sacrifice their share of profit in
favour of the new partner.

786. Sales Book: This book is used to record credit sales only. Goods sold for cash, and
sale of assets for cash or credit will not be recorded in this book. The entries in sales
book are made from copies of the Invoices. The sales day book will be totaled
periodically. The balance amount will be posted tot he credit side of the sales
account.

787. Sales returns Book: This book is also known as Returns Inward Book. This book
records the particulars of goods returned by the customers. It helps the trader to
know how much goods the customers have returned.

788. Salvage value : The amount remaining after a depreciated useful life. It refers to the
residual or recoverable value of a depreciated asset. It should be noted that the gross
salvage value may be adjusted by a removal or disposal cost. This adjustment would
lower the gross salvage value.

789. Secondary market : The market where previously issued securities are traded. Most
trading is done in the secondary market. The New York Stock Exchange, Amex,
Nasdaq, the bond markets, etc., are secondary markets.
 95

790. Settlement date : The date of the financial satisfaction of a transaction. This
satisfaction can include payment and delivery of securities. In recent years, there has
been progress towards closing the gap between trade date and settlement date.
Many back office systems are primarily focused on trades or transactions. Here, too
the gaps are narrowing with the implementation of middle office software.

791. Shareholder : One who owns shares. In a mutual fund, this person has voting rights.

792. Shareholder’s equity : The amount by which total assets exceed total liabilities. Also
known as net worth or book value, shareholders’ equity is what would be left over for
shareholders if the company were sold and its debt retired. It takes into account all
money invested in the company since its founding, as well as retained earnings.
examining the price-to-book ratio (P/B) of an industrial company with a lot of hard
assets is a good way of telling if it’s undervalued or overvalued.

793. Shares : Shares are issued by a company to raise money. Unlike bonds, which are a
straightforward loan, shares give you ownership of part of the company. most shares
are listed on a stock exchange, which makes them easy to buy and sell, although
dealing costs may be expensive, which is another attraction of investing in a unit trust
as the costs are shared with lots of others.

794. Short : The position opposite that of a long. Some who is short the market.

795. Short coupon : Refers to the initial coupon for a municipal security which reflects
less than 6 months of accrued interest. The time of accrual is measure from the start
of the Dated Date and continues until the end of the initial accrual period.

796. Short covering : Trades that reverse, or close out, short-sale positions. For instance,
when a stock rises sharply in price, investors who shorted the stock, expecting it to
fall, are often forced to purchase the shares they borrowed from their brokers. That
can push the price of the stock up even higher.

797. Short hedge : Refers to the status of the open futures contract equivalent position.
Here, it is understood that the hedger is short futures against a long actual position.

798. Short selling : The act by which a speculator or risk manager sells an instrument at
a high price with the intent of purchasing it lower. This is particularly the case for the
 96

speculator. The risk manager would generally be selling short against a specific or
global exposure. There are technical differences in selling short on the futures and
securities markets. Also, the purchase of puts or other derivative strategies can serve
as a substitute for being short. There are different rules which apply to short sellers
on securities markets. The key differences are between market makers and market
participants.

799. Short squeeze : Occurs when the price of a security rises sharply, causing many
short sellers to buy the security to cover their positions and limit losses. That buying
leads to even higher prices, increasing the losses of short sellers who haven’t
covered their positions.

800. Short-term gain or loss : For tax purposes, the profit or loss from selling capital
assets or securities held 12 months or less. Short-term gains are taxed at your
regular income-tax rate, which can be as high as 39.6%. It pays not to trade. At the
moment, the maximum federal tax rate on long-term capital gains is only 20%.

801. Sigma : An option term sometimes used as a synonym for vega, lambda or kappa.

802. Simple Cash Book: It is also called Single column cash book. Simple cash book is a
Cash Book which appears like an ordinary account. It will have one amount column
on both the sides. The left side records receipts and the right side records payments.
The difference between the debit side and credit side represents the balance. The
simple cash book always shows debit balance only. This cash book records only cash
transactions. For bank transactions, a separate Bank Account is opened in the
ledger.

803. Simulations : The results or the processes of generating data and outcomes for
different paths and scenarios. It provides a statistical framework for what-if conditions.
The art of the simulation is trying to construct an elegant, representative model. This
model should properly weigh, in a probabilistic sense, the expected behavior of the
time series.

804. Single Entry System: It is a crude and unscientific method of maintaining accounts.
Single entry system does not mean that only one aspect of a transaction is recorded.
It simply refers to incomplete records or the defective double entry system. Under this
system all the transactions are not recorded. Similarly, all the accounting books are
 97

not maintained. This system is having many defects. The preparation of trial balance
and financial statements is difficult under this system.

805. Skewness : Occurs when a distribution is not symmetrical about its mean. A
distribution is symmetrical when its median, mean, and mode are equal. A positively
skewed distribution occurs when the mean exceeds the median. A negatively skewed
distribution occurs when the mean is less than the median. These conditions are also
known as skewed to the right and skewed to the left, respectively.

806. Small caps : Another name for smaller companies, as measured by their market
capitalization. Our definition of a smaller company is one which has a market
capitalization of less than US$500 million, which is still quite sizeable by most
standards. Usually a switch discount of up to 3% off the offer price is given.

807. Solvent: One who is able to pay One’s debts when they become due.

808. Sovereign : Refers to a debt security issued by a government other than the United
States. It is often believed that the issuing government via its treasury will fully back
the payment of interest and principal in a timely manner. Sometimes, that backing is
insufficient and a default occurs.

809. SPAN : The Standard Portfolio Analysis of Risk system. It was initially developed and
implemented by the Chicago mercantile Exchange. Other exchanges and clearing
houses have since adopted this methodology. It evaluates the performance bond, or
margining requirements, for position on a portfolio basis. It matches and evaluates
similar instruments. These instruments can be futures, options, and derivatives.
SPAN tries to indicate the largest potential one-day loss that a portfolio might
experience. These losses can be attributable to adverse price and volatility behavior.
Since the inception of SPAN, methodologies such as Value at Risk (VAR), have also
focused on standard deviation (confidence level)statistics. SPAN uses 16 different
scenarios or market conditions in the calculation of the risk arrays.

810. Speculation : Gambling on a risky investment in hopes of a high pay off down the
road.
 98

811. Spot market : A market for buying or selling commodities or foreign exchange for
immediate delivery and for cash payment. Trades that take place in futures contracts
expiring in the current month are also called spot market trades.

812. Spot price : The price of a commodity or currency available for immediate sale and
delivery.

813. Spread : In stocks, the difference between the bid price and ask price. In bonds, the
difference between the yields on securities of the same credit rating but different
maturity or the difference between the yields on securities of the same maturity but of
different rating. The term also represents the difference between the public offering
price of a new issue and the proceeds the issuer receives.

814. Stock : A position which is focused on a particular delivery or expiration date. For
example, a futures position which is comprised of 12 contracts all of which are
established for December delivery.

815. Stagflation : A combination of high inflation and slow economic growth. A term
coined in the 1970s, stagflation described the previously unprecedented combination
of high unemployment (stagnation) with rising prices (inflation). The principal factor
was the fourfold increase in oil prices imposed by OPEC in 1973, which raised prices
throughout the economy while slowing economic growth. Traditional fiscal and
monetary policies aimed at reducing unemployment only exacerbated the inflationary
effects.

816. Standard Coins (Full bodies coins) : Coins whose face value and intrinsic value
were the same.

817. Standard Deviation : A measure of volatility, risk, or statistical dispersion. The

standards deviation is calculated by : computing the mean of the series then taking
the deviation by subtracting the mean from each observation, squaring the
differences or deviations for each observation, squaring the differences or deviations
for each observation, dividing the sum of the squared deviations by the number of
observations and then calculating the positive square root of the sum of squared
deviations. In other words, the standard deviation is the positive square root of the
variance.
 99

818. Standard normal distribution : Occurs when the underlying normal distribution is
converted by changing its scale. The importance of this is that different normal
distributions can now be compared to one another. Otherwise, separate tables of
values would have to be generated for each pairing of mean and standard deviation
values. This standardized variate term is often expressed as Z is N (0, 1), or Z is a
normal distribution with a mean value of zero and variance equal to one.

819. Standard variable rate : A lender’s standard mortgage rate. This goes up and down
with interest rates generally.

820. Statistical analysis : A mathematical approach which quantifies market action. In its
general form, it is reliant on large sample statistics and linear analysis. It assumes
independence. Its popular terms are : the mean, variance, standard deviation, alpha
and beta.

821. Stochastic : A condition in finance or economics whereby changes occur on a more

abrupt basis than those expected to be “normally” encountered. In some ways
stochastic has infinite variance and / or non-converging means implications.

822. Stock : An investment that represents part ownership of a company’s assets and
earnings. there are two different types of stock : common and preferred. Common
stocks provide voting rights but no guarantee of dividend payments. Preferred stocks
provide no voting rights but have a set, guaranteed dividend payment. Preferred
stock also enjoys prior claim to company assets over common stock in the case of a
bankruptcy. Contrast with bond.

823. Stock exchange : A forum for the trading of stocks, shares and other securities. The
London Stock Exchange is the main stock exchange in the United Kingdom.

824. Stock option : An option in which the underlying security is the common stock of a
corporation, giving the holder the right to buy or sell its stock at a specified price by a
specific date. Also, it is a method of employee compensation that gives workers the
right to buy the company’s stock during a specified period of time at a stipulated
exercise price. In recent years, offering top executives stock options as compensation
has become increasingly popular.
 100

825. Stock split : A change in a company’s number of shares outstanding that doesn’t
change a company’s total market value, or each shareholder’s percentage stake in
the company. Additional shares are issued to existing shareholders, at a rate
expressed as a ratio. A2-for-1 stock split, for instance, doubles the number of shares
outstanding. So an investor holding 100 shares of a $60 stock would have 200 shares
of a $30 stock following a 2-for-1 split. But his percentage of equity in the company
remains the same. Typically, management will split a stock to make the shares more
affordable to a greater number of investors.

826. Stock broker : Person licensed to sell stocks and other types of securities. Also
known as a registered representative.

827. Strip : A bond, usually issued by the U.S. Treasury, whose two components, interest
and repayment of principal, are separated and sold individually as zero-coupon
bonds. Strips generally have a slightly higher return than a regular Treasury bond, but
they don’t pay regular interest payments. Instead the buyer receives the return by the
gradual appreciation of the security, which is redeemed at face value on a specified
maturity date. Strip is an acronym for Separate Trading of Registered Interest and
Principal of Securities.

828. Straight Line Method : It is the simplest method of charging depreciation. Under this
method, depreciation is arrived at by providing the original cost of the asset estimated
life period.
Annual Depreciation = Cost of Assets – Scrap Value
-----------------------------------------
Estimated Life of asset (in years)

829. Strip Index : A filing system based on sheets of cardboard strips into which file
names can be typed or written.

830. Subrogation : It means substitution of the insurer in the place of the insured.
According to this principle, the insurer, after compensating the insured, will have the
right to exercise all the powers of the insured over the property insured.

831. Subscriptions : Subscriptions is the main source of income of non-trading concerns.

Subscription received from members is a revenue item and credited to Income and
Expenditure Account. The subscriptions received from members first is to be shown
 101

as receipt in the Receipts and Payments Account and then as an income in the
Income and Expenditure Account.

832. Subsidiary books: Subsidiary books are also known as books of Original entry.
Transactions are recorded first in these books. Later these will be transferred to their
respective accounts in the ledger. Subsidiary books provide many advantages. They
help in division of work and save time. Ledger postings is easy from subsidiary books.
They provide ready made information of relating to a class of transaction. Subsidiary
books are divided into eight types.

833. Super Profits : Excess of average expected profits over normal profits.

834. Surrender : where you cancel an investment or policy and usually receive a reduced
pay out, due to the impact of charges.

835. Surrender value : It was amount which an insurance company is prepared to pay to
the insured in case of termination of the policy before its maturity.

836. Suspense Account: When the Trial Balance does not agree, an effort is made to,
locate errors and rectify them. But if the errors cannot be located easily and quickly
and, at the same time, if the final accounts are to be prepared urgently, the difference
in the Trial Balance is rectified by writing it to the lesser side of the Trial Balance
under the name of Suspense Account. Such a temporarily opened suspense
account is to be closed later on when the errors are located and rectified.

837. Swap : A customized financial transaction between two or more counter parties.
however, banks or brokerage firms often act as intermediaries or assume some of the
risk of the total transaction as well. A swap is engineered between counter parties
who agree to make periodic payments or adjusts to one another. Swaps cover
interest rate, equity, commodity and currency products. They can be simple floating
for fixed exchanges or complex hybrid products with multiple option features. Swaps
are not exclusively OTC transactions because listed instruments are often include in
the risk management of the position. Often managers evaluate the relative merits of
conducting a swap (OTC) or a hedge predicated on listed instruments. The
interaction between these two markets promotes greater financial efficiencies.
 102

838. Sweetener : An added incentive to purchase a security. One example of this would
be the coupling of warrants with a convertible bond issue. Here, the warrants would
be viewed as the sweetener.

839. Telex : Use of teleprinters for sending and receiving messages.

840. Terminal Value : Refers to the financial remainder, residual amount, or end-of-
process (life) valuation. Some examples are the remaining value of an expired option
or hedge position. It may also refer to a non-discounted or discounted financial value
for an investment.

841. Theory of cross hedging : Refers to a modification of the hedging process. It

depends on hedging principles, practices and strategies but with a relaxation of strict
standards of cash position specifications versus hedge instrument specifications.
Often there can be a slight difference in grade, location, maturity, actual portfolio
composition or product relative to the optimal hedge instrument. For example,
treasury bond or note futures might be used in conjunction with To Be Announced
securities (TBAs) to hedge mortgage backed securities portfolios. Mortgage backed
securities are not deliverable against treasury bond futures, but there are features
which improve the overall hedging efficiency by using blended hedges.

842. Theta : The sensitivity of an option premium or price relative to changes in time. This
characteristic tends be viewed on an instantaneous basis in financial literature and on
a daily change basis in practice.

843. Theta risk : Refers to the time value exposure for an option. Academic literature
tends to view it on an instantaneous basis whereas practioners tend to view it on a
daily basis. For the later it can calculate the time value difference between 6.7.00 and
6.8.00 all other things being held constant. Then the amounts would be expressed in
dollars or other designated currency.

844. Token Coins : Coins whose face value was much higher than their intrinsic value.

845. Time value : Has two general meanings. The first is the value or amount of a sum of
money adjusted by an interest rate for a given time period. The second common
usage is in the context of options. Here, it defines the amount of premium attributed
to the remaining term of the option after factoring out any in-the-money component.
 103

846. TIN : Refers to the Tax Identification Number or to the Tax Payer Identification
Number.

847. Total invested capital : Total invested capital is a tally of all the outside investments
a company’s management has used to finance its business : everything from equity
(the amount of stock sold) to long-term debt. It is calculated by taking the sum of
common and preferred stock equity, long-term debt, deferred income taxes,
investment credits and minority interest. Total invested capital is the denominator of
the debt-to-capital-ratio, a ratio that measures how leveraged a company is.

848. Total liabilities : A company’s total current liabilities plus long-term debt and
deferred income taxes. Total assets can be found on a company’s balance sheet.
Total assets minus total liabilities equals book value or net worth.

849. Total Method: Under this method the total of debits and credits of all accounts are
shown in the trial balance respectively in the debit and credit side of the trial balance.
The trial balance prepared under this method is known as gross trial balance.

850. Total return : The full amount an investment earns over a specific period of time.
When dealing with mutual funds or securities, total return takes into consideration
three factors : changes in the NAV or price; the accumulation / reinvestment of
dividends, the compounding factor over time. The return is presented as a
percentage and is usually associated with a specific time period such as six months,
one year or five years. Total Return can be cumulative for the specific period or
annualized. If it is cumulative, it describes how much your investment grew in total for
the entire period. If it is annualized, it describes the average annual return over the
period of years described.

851. Trade Association : Trade Association is a voluntary association of traders formed

to promote the mutual interest of individuals or companies engaged in the same kind
of business.

852. Trading Account: It is prepared for ascertaining the gross profit or gross loss. It
helps in the calculation of cost of goods sold. It also helps in the calculation of gross
profit ratio.
 104

853. Trading concerns: Trading concerns are those business concerns (establishments)
which buy goods from suppliers and sell them to customers at profit. These concerns
do not undertake any manufacturing activity. The final accounts of a trading concern
consists of trading and profit and loss account and balance sheet.

854. Tramps : Ships having non-scheduled journey as per the requirement of the sender
of goods.

855. Transaction: Any sale or purchase of goods or services is called the transaction.
Transactions are three types. They are: (I) Cash transactions; (ii) Credit transactions;
and (iii) Non – cash transactions (Depreciation, return of goods etc.)

856. Transferring Entries: Sometimes the trader transfers an amount from one account
to another account. Then he writes transfer entry. This entry is made in the journal
proper only.

857. Trial Balance: In double entry system of book-keeping for every debit there must be
a credit. As such all the debit balances should be equal to credit balances. To prove
this a comprehensive statement of debits and credits will be prepared by the
accountant. This statement is known as Trial Balance. Thus the trial balance is a
statement of debit and credit balances. It is prepared on a particular date, with the
object of checking the arithmetic accuracy of the book of accounts.

858. Triple Column Cash Book: In a three column cash book there are three columns on
each side viz., discount, cash and bank transactions. Cash and bank columns on
each side records cash and bank transactions respectively. Discount columns on
debit and credit side are maintained for discount allowed and received. One more
important point relating to three column cash book is contra entry.

859. Turnover : In accounting terms, the number of times an asset is replaced during a
set period. In trading, the volume of shares traded on the exchange on a given day. In
employment matters, turnover refers to the total number of employees divided by the
number of employees divided by the number of employees replaced during a certain
period.

860. Turnover ratio : A measure of a fund’s trading history that is expressed as a

percentage. A fund with a 100% turnover generally changes the composition of its
 105

entire portfolio each year. A low turnover figure (20% to 30%) would indicate a buy-
and-hold strategy. High turnover (more than 100%) would indicate an investment
strategy involving considerable buying and selling of securities. Funds with higher
turnover incur greater brokerage fees for affecting the trades. They also tend to
distribute more capital gains than low-turnover funds, because high-turnover funds
are constantly realizing the gains. A change in a fund’s general turnover pattern can
indicate changing market conditions, a new management style or a change in the
fund’s investment objective.

861. Two-sided errors : An error which involves two or more accounts and effect both
known as Rectifying Entries.

862. Uberrimae Fibei : It means principle of utmost good faith. Insurance contract is
mainly based on this principle.

863. Uncertainty : Usually refers to risk or volatility.

864. Underwriter : An investment banker who purchases shares of a company that is

going public, then resells them to investors for a higher price. When an underwriter
brings shares of a new company to market it is called an initial public offering (IPO).
Investment banks can also underwrite secondary offering of existing public
companies.

865. Unfavourable Balance (Overdraft): Unfavourable Balance as per cash book means
credit balance. On the other hand, unfavourable balance as per pass book means
debit balance.

866. Up-and-in : An option feature by which a derivative contract becomes active when an
indicator, such as price, goes through an upside trigger point or threshold. Related
topics are Down-and-out, Down-and-In, and Up-and-Out.

867. Up-and-out : An option feature by which a derivative contract dies or ceases to be

active when an indicator, such as price, goes through an upside trigger point or
threshold. Related topics are Down-and-Out, Down-and-In, and Up-and-In.

868. Valuation : Carried out by a professional surveyor to establish how much the
property is worth and whether it is suitable to lend a mortgage on. There are 3 types
 106

of valuation that can be done, a basic valuation, homebuyers report or full structural
survey.

869. Value Added Tax (VAT) : An indirect tax payable by adding it onto the value of most
goods and services.

870. Venture capital : Financing for new businesses. Start-up companies that receive
venture capital are perceived to have excellent growth prospects but don’t have
access to capital markets because they are private companies. In return for venture
capital, investors may receive a say in the company’s management, as well as some
combination of profits, preferred shares or royalties. Sources of venture capital
include wealthy individual investors, investment banks, and other financial institutions
that pool investments in venture-capital funds or limited partnerships. The risks and
rewards of venture-capital investing can be extreme.

871. Vertical Filing : A filing system under which files are kept in folders standing upright.

872. Voucher: Whenever payment is made either in cash or by cheque, the party
receiving the payment issues a receipt. Payments made are supported by receipts
issued by the payee. Such a receipt is known as voucher.

873. Vulture funds : Investment vehicles which focus on acquiring properties which may
be available due to financial distress. Principal owners may be in immediate need of
cash. Usually, the term describes investment activities in real estate or closely held
companies which may not enjoy the liquidity benefits of an exchange listing.

874. Warehouse : A place where goods are stored after manufacturing or production.

875. Warehouse Warrant : It is a document of title given by warehouse keeper in favour

of the owner of the goods, who stored them in the warehouse. It is a document of title
to goods.

876. Warehouse – Keeper’s receipt : It is a receipt issued by the warehouse-keeper to

the owner of the goods. It serves as a proof of storing certain goods. It is not a
document of title to goods.
 107

877. Warrant : A security entitling the holder to buy a proportionate amount of stock at
some specified future date at a specified price, usually one higher than the current
market price. Warrants are issued by corporations and often used a s a sweetener
bundled with bonds or preferred stock to enhance their marketability. They are like
call options, but with much longer time spans that can stretch into years. In addition,
warrants are offered by corporations whereas exchange traded options are not.

878. Warranty : A warranty in a marine insurance contract denotes a clause in the policy
which must be strictly complied with for the insurance to be effective.

879. Wash sale : The sale of a security or instrument and the subsequent purchase with
no economic interest. It can be motivated by tax or reporting purposes. It is generally
deemed to be a sham transaction. It can also be constructed as creating fictitious
trading activity.

880. Wasting assets: Wasting assets are those assets which lose their value by wear and
tear or by the passage of time or extraction. Mines are the best example of wasting
assets.

881. Way Bill : The way bill is an acknowledgement of receipt of goods for transport by
the Transportation company. The consignee by presenting the Way Bill can take the
delivery of goods at the destination point.

882. Window dressing : Trading activity near the end of a quarter or fiscal year that is
designed to dress up a portfolio to be presented to clients or shareholders. For
example, a mutual fund manager may sell losing positions in his portfolio right before
his semiannual report is released so he can display only positions that have gained in
value.

883. Working Capital: The part of capital available with the firm for day – to – day working
of the business is known as working capital. Working capital can also be expressed
as under.
Working capital = Current Assets – Current Liabilities.

884. World Bank : An organization created to make loans primarily to developing

countries, with the stipulation that these governments must guarantee the loan. Its full
name is the International Bank for Reconstruction and Development.
 108

885. World Trade Organization (WTO) : An institution created by the General Agreement
on Tariffs and Trade that oversees international trade issues, resolves trade disputes
and enforces the GATT trade pact. Abbreviated as WTO.

886. Written Down Value : Book value of an asset after deducting depreciation from the
original cost.

887. WTO : World Trade Organization is an international trading organization where the
countries having interest in international trade are the members.

888. XD : Ex-dividend. This is the interval between the announcement and placement of
the next dividend or, in the case of a unit trust, the income distribution. Some one
who invests during the interval between two distributions and is not entitled to the
dividend. With an income-paying unit trust, the ‘xd’ date is usually about eight weeks
before its distribution date.

889. Yield curve : Refers to the graphical or tabular representation of interest rates across
different maturities. The presentation often starts with the shortest term rates and
extends towards longer maturities. It reflects the market’s views about implied
inflation/ deflation, liquidity, economic and financial activity and other market forces.

890. Yield spread : The difference of the yield between various securities. Yield spreads
are often used to compare bonds of different maturities or credit ratings. Bonds with
lower credit ratings and longer maturities tend to have higher yields than those with
good ratings and short maturities. In evaluating a lower quality bond, you must decide
whether the yield spread to better rated issues is worth the extra risk of default.

891. Yield to call : The yield on a bond assuming the bond is redeemed by the issuer at
the first call date. A bond’s call provision is detailed in its prospectus. Yield to call
differs from yield to maturity in that yield to call uses a bond’s call date as the final
maturity date (most often, the first call date). The price at which an issuer can call a
bond is the call price. The call price generally includes a call premium that is greater
than the bond’s face value. Conservative investors calculate both a bond’s yield to
call and yield to maturity, selecting the lower of the two as a measure of potential
return.
 109

892. Yield to maturity : The rate of return which is measured by the current expected
income stream relative to the prevailing market price assuming that the asset is held
until maturity. If the instrument is trading at a discount, then the yield to maturity will
be greater than the coupon rate. If the instrument is trading at a premium, then the
yield to maturity will be less than the coupon rate.

893. Zero cost collar : A transaction which has little or zero cash outlay or cost for the
initiating person. Often, a security is held and some protection is sought via a hedging
transaction. One example, would be the purchase of an out-of-the-money put (debit)
and the sale of an out-of-the money call (credit). Here, the premiums for the debit and
credit are nearly the same. Therefore, there would be little or no cost for the person
seeking the hedge. However, this position places a cap on the potential reward for
holding the underlying asset. Essentially, the protection does not kick-in until the price
of the underlying instrument goes below the exercise price for the put. Generally
speaking, it should be noted that if the hedger occurred with both options at-the-
money, then the person replicated a synthetic short against an actual long position.
For the latter, the hedge would be considered as delta neutral whereas using two out-
of-the-money options, the hedge at the origination would not be delta neutral. Rather,
it would be computed as a partial hedge when placed.

894. Zero coupon bond : A security which the interest and / or principal has been
discounted to be offered at less than the stipulated principal or coupon amount due at
maturity or early option payment. These securities effectively behave like treasury
bills or other paper offered at an original discount. Zero coupon bonds can have
conversion factors and other features implicitly embedded or explicitly stated.

895. Zero curve : A yield curve comprised of the yields of zero coupon bonds arranged
over time. Frequently, this arrangement is graphically portrayed starting with the
shortest maturities and progressing to the longest maturities. The curve would
provide the basis for pricing other securities using iterative or interpolation
techniques.

896. Zero-minus-tick : Refers to a trading transaction made at the same price as the
preceding one but the preceding one was lower than its predecessor.

897. Zero-plus-tick : Refers to a trading transaction made at the same price as the
preceding one but the preceding one was higher than its predecessor.
110