Glossary of Terms

Credit rating.
Indicating the strongest long term credit rating in Standard and Poor's and Fitch's designations.
Credit rating.
Indicating the strongest long term credit rating in Moody's designation.
Abandonment option
The valuable operational choice available to the owner of a project or of a business, to abandon all or part of it.

This is an example of a real option.
Other examples of real options include the options to expand, contract or defer the given project or business.

Also known as a Termination option.
Abbreviated accounts
UK company law.
In order to reduce administrative burdens on small companies in the UK, they are not required under UK company law to produce full accounts for public filing at Companies House.
Instead they are allowed to prepare and file shorter-form 'abbreviated accounts'.

Medium sized companies can also file abbreviated accounts if they fulfill certain requirements.

However, fuller-form and more detailed company accounts are still required for other purposes. For example for tax purposes and for reporting to the shareholders.

Similarly shortened versions of accounts produced in other jurisdictions, or for other limited purposes.
Asset Backed Commercial Paper.
Association of British Insurers.
Accrued Benefit Obligation.
Asset-Backed Securities.
Absolute purchasing power parity
A form of purchasing power parity theory which states that under a fully floating exchange rate regime the ratio between domestic and foreign price levels should be equal to the equilibrium foreign exchange rate between the domestic and foreign currencies.
Loan documentation.
A requirement for the immediate repayment of the whole of a loan by a borrower - regardless of the scheduled repayment terms - following an event of default.
Accept giros
Credit transfer.
Giros usually supplied and completed by the beneficiary with all the relevant details and sent to the payor along with an invoice.
The payor then signs the giro (in other words accepts it) and forwards it to the bank.
The bank debits the payor’s account and puts the giro into the clearing system.
A bill of exchange which has been 'accepted' by a high quality credit - usually a bank - effectively guaranteeing payment and thereby enhancing the credit quality of the bill.

2. Law.
One of the essential requirements for the formation of a contract under English law.
Another essential requirement being an offer.
Acceptance credit
A UK money-market term for a bill of exchange drawn by a customer on its bank, which is accepted and then discounted by the bank, the proceeds being paid to the customer.
A balance held with a financial institution to facilitate transactions, such as a bank account or securities account.

2. Accounting.
A division of a ledger for entries recording related transactions.
Account analysis
A statement, essentially an invoice for services, which a financial institution provides to its commercial customers specifying services provided, volumes of transactions processed and charges assessed.

The statement is used by the customer for cash management and other purposes.
Account positioning
Cash management.
The task of establishing, usually on a daily basis, the expected end-of-day closing cash position.

Also known as cash positioning.
The practice and theory of preparing accounts for an organisation, whether for internal or for external use.
Accounting bases
The methods developed for applying fundamental accounting concepts to individual transactions and financial items.
Accounting concepts
A small number of fundamental concepts which underlie the completion of periodic financial accounts of businesses under generally accepted accounting practice.
The concepts include going concern, accruals, consistency and disaggregation.
Accounting Council
The part of the Financial Reporting Council in the UK that is responsible for making, issuing, amending and withdrawing accounting standards.

This role was formerly undertaken by the Accounting Standards Board.
Accounting exposure
Risk management.
The potential impact on an entity's accounts of a particular policy or transaction.

For example the effect on group accounts in applying accounting policies relating to the translation of assets and liabilities denominated in currencies other than the group's functional currency.

Potential secondary adverse effects resulting from accounting exposure (as defined above).
For example the potential breach of a borrowings covenant.
Accounting group
A group is deemed to exist for accounting purposes in circumstances where a parent undertaking controls one or more subsidiary or associate undertakings.
Accounting period
A period upon which UK corporation tax is assessed and charged on profits arising in the period.
This period cannot exceed 12 months.

Also known as the 'period of account'.

The period for which any set of accounts is prepared.

Also known as the 'period under review'.
Accounting policies
Accounting bases of valuation or measurement specific to a reporting entity. The entity should consistently follow accounting policies from period to period.

Accounting policies must be determined in accordance with the relevant GAAP (Generally Accepted Accounting Principles).
Accounting rate of return
A measure of accounting return on investment.

Both the return and the amount of the investment are measured based on accounts (book) values.
Accounting reference date
The date to which a reporting entity's financial accounts are made up.
Accounting return on investment
A measure of profitability based on accounting profits divided by the book value of invested capital.

This measure may be calculated in a number of different ways, for example:
[Average annual accounting profit over the project life] ÷ [Average book value of investment in the project]
Accounting standards
Published guidance for the preparation of financial statements.
For example IAS (International Accounting Standards), IFRS (International Financial Reporting Standards) and - in the UK - FRS (Financial Reporting Standards).
Accounting Standards Board
Formerly the part of the Financial Reporting Council in the UK that was responsible for making, issuing, amending and withdrawing accounting standards.

This work is now carried out by the Accounting Council (part of the Financial Reporting Council).

The externally reported financial statements of an organisation. These include summaries, in conventional and prescribed formats, of the organisation's assets, liabilities, income, expenditure and cash flows.

The internal financial summaries used by an organisation. Also known as management accounts.

The fully detailed internal financial records of an organisation, from which summary financial statements or management accounts may be prepared.
Accounts payable
Short-term obligations owed by a business to creditors, suppliers and vendors.
Accounts payable management
The different strategies that allow organisations to manage the cost of the liabilities resulting from the purchase of goods and services.
Accounts receivable
Assets resulting from the extension of trade credit to customers.

Also known as trade debtors.
Accounts receivable conversion
An automated clearing house transaction format that allows the electronic clearing and settlement of cheques by converting them to electronic transactions at lockboxes or other collection sites.

Also known as conversion.
Accounts receivable management
The different strategies that can be adopted to manage the collection of outstanding receivables.
A term meaning that the principal amount is increasing over time, for example as a result of the scheduled drawdown of a loan in tranches. This would also apply to a deposit where any interest is effectively re-invested.
Accreting swap
A type of interest rate swap.

An accreting swap is one where the notional principal amount is growing over time.
Used - for example - to hedge a loan being drawn down in instalments.
1. Accounting.
An amount owing - but not yet invoiced - for services or goods received during the accounting period. An accrual is a form of liability, because it represents cash that will have to be paid out in the future, for a benefit that has already been received.

2. Pensions.
In a defined benefit pension scheme, the build up over time of entitlement to future benefits, resulting from additional years of pensionable service.
Accrual rate
The rate at which benefits build up for each year of service in a defined benefit pension scheme.

Accruals basis
In financial accounting, the spreading of profits and losses on hedging instruments over the life of the underlying exposure being hedged.

In accounting more generally, the appropriate spreading of income and expenditure items into the periods to which they relate. This may differ from the period in which the associated cash receipts or payments take place. (An alternative simpler basis of accounting would be a cash basis.)

A basis of taxation which follows the accruals basis of financial accounting.
Loan relationship income is taxed on an accruals basis for UK tax purposes.

4. UK tax.
The recognition for UK tax purposes of all profits and losses on a loan relationship over the life of the loan.
Accruals concept
The principle that revenues, profits and the associated costs incurred while earning them should be included in the same period's profit or loss account or income statement.
Also known as Matching.
Accrued benefit obligation
The present value of pension benefits owed to employees under a pension scheme’s benefit formula without any projected salary increases and discounted at a nominal rate of interest.
Accrued benefits
The benefits for service up to a given point of time in a defined benefit pension scheme, whether or not vested.
They may be calculated in relation to current salary or projected salary and allowance may also be made for statutory or discretionary revaluation.
Accrued benefits funding method
A pensions funding method in which the actuarial valuation at the valuation date relates to the actual benefits for pensioners and deferred pensioners and their dependants and the accrued benefits of active members.

Allowance will generally need to be made for future increases to salaries and benefits and for new members and early leavers.
Accrued income
Revenue earned by a business but not yet invoiced or received.
Accrued interest
The interest accumulated on a debt security since its issue date - or last coupon payment date - but not yet paid out.

This is accounted for in the actual gross purchase price of the debt security.

Any other amount of interest accumulated but not yet paid.
Accumulated depreciation
The accounting values of most fixed assets, such as buildings, machinery, office equipment and vehicles are depreciated over their useful lifetime.

Land is not depreciated as its value is not considered to diminish over time.
Automated Clearing House System.
ACH credit transaction
An automated clearing house (ACH) transaction that involves the transfer of funds from an originator’s account to a receiver’s account.
ACH debit transaction
An automated clearing house (ACH) transaction that moves funds from the receiver’s account to the originator’s account.
ACH operator
An automated clearing house (ACH) association or Federal Reserve Bank that processes and distributes ACH transactions received from an originating financial institution.
ACI The Financial Markets Association
Paris-based trade association for the international foreign exchange markets.

Formerly the Association Cambiste Internationale.
Acid test
Also known as Quick ratio.

The term originates from the use of nitric acid to test the authenticity of gold.
Acid test ratio
Also known as Quick ratio.
A financial institution - often a subsidiary of a bank - that ‘buys’ credit card transactions, with recourse, from a retailer.

The acquirer will present the transactions to the card issuer for payment. Then the acquirer pays the retailer the amount of the card transactions less a discount - which covers their own and the card issuer’s fee for handling the transaction. This is how retailers get paid.
The purchase by a business of another business (including its assets and its liabilities, its contracts with employees, and its other contractual rights and obligations).
Acquisition accounting
Financial reporting.
Acquisition accounting is the generally accepted method of financial accounting for subsidiaries.

Acquisition accounting regards the combination of the holding company and the subsidiary as being the acquisition by one company of another.
The difference between the fair value of the consideration given and the fair values of the entity acquired is accounted for as goodwill.

Also known as full consolidation.
Goods or services purchased by a UK VAT registered business from a business registered for VAT in another EC member state.
Automated Clearing Settlement System.
The Association of Corporate Treasurers.

Abbreviation for ACTual, in day count conventions.

The former UK Advance Corporation Tax.
An Act is a formal codification of law by a country's legislative body (for example the Companies Act 2006 of the UK Parliament).
ACT Ethical Code
Set of principles which should be followed by all members and students of the Association of Corporate Treasurers.

In summary the principles are:
(a) Integrity.
(b) Independence in making professional judgements.
(c) Courtesy and consideration.
(d) Professional competence.
(e) Confidentiality.
(f) Compliance with laws, regulations and conventions.
(g) Compliance with codes and rules of other relevant professional bodies.
1. Pensions.
An active member.

Generally in relation to companies, any company which is not dormant.

3. Tax.
For tax purposes a company is normally defined as active - and potentially liable for Corporation Tax - when it does any one (or more) of the following:
- Carrying on any business activity or trade or profession.
- Buying and selling goods with a view to profit.
- Providing services.
- Earning interest.
- Managing investments.
- Receiving any other income.
Active income
Income for which the taxpayer performs services.
Examples include wages, salaries, tips, bonuses, and business and partnership income.
Active member
A member of a defined benefit pension scheme who is at present accruing benefits under that scheme by virtue of continuing service.
Activity ratio
A financial ratio designed to measure the efficiency of management in controlling the working capital of the business.
For example, the inventory turnover ratio.
Actuarial Council
The part of the Financial Reporting Council, that sets and improves actuarial technical standards.
Actuarial gain
Pensions accounting.
An element of actuarial gains and losses.
Actuarial gains and losses
Pensions accounting.
Changes in actuarially calculated pensions deficits or surpluses over time arising from either or both of:

Differences between the actual events as they have turned out and the assumptions that were made as at the date of the earlier actuarial valuation.
(Also known as experience gains and losses.)

Changes in the actuarial assumptions over time.
Actuarial liability
The value placed on all the liabilities of a defined benefit pension scheme falling due after the valuation date.
Actuarial loss
An element of actuarial gains and losses.
Actuarial method
Financial accounting.
The allocation of the finance charge in a finance lease using the internal rate of return of the lease cash flows (equivalent to the implied rate of interest in the lease cash flows).

Similar methods of allocation in relation to other cash flows.
Actuarial valuation
An investigation by an Actuary into the ability of a defined benefit pension scheme to meet its actuarial liability.

The related money amounts - assessed by an Actuary - of the pension scheme's liabilities, assets and surplus or deficit.
An individual qualified - amongst other skills - to advise on certain financial matters in connection with pension schemes, for example the valuation of assets and liabilities, including key assumptions such as mortality.
Aggregate Demand.
Ad valorem
1. Tax.
A charge based on the value of the transaction.

More generally, any charge or fee based on the value of a transaction.
Asian Development Bank.
An amount charged to accounting profits which is not eligible for tax relief, for example entertainment.
Such an item would be added back to the accounting profits, in the calculation of taxable profits in the taxpayer's tax computation.
Additional Optional Services
Single Euro Payments Area.
Additional paid-for functionality, supplementing the core SEPA payments and transfers Scheme.
Additional voluntary contributions
UK Pensions.
UK pension contributions over and above those contractually required, paid by a scheme member and thus securing additional pension benefits.

Payments to a scheme separate from the members’ occupational pension scheme are known as free-standing additional voluntary contributions (FSAVCs).
Abu Dhabi Interbank Offered Rate.
1. UK tax.
The process in stamp duty whereby the document and supporting evidence is sent to Her Majesty's Revenue & Customs to determine the amount of stamp duty payable.

2. Law.
The settlement of a dispute by a formal legal procedure.

The settlement of disputes by various less formal procedures, with the aim of providing quicker, cheaper and less confrontational resolutions.
Adjusted contribution rate
This is the normal contribution rate adjusted to eliminate any difference between the Target Fund and actual asset value at the valuation date (the difference being the surplus or the deficit).
Adjusted present value
A method of project appraisal which seeks to identify and evaluate separately the benefits of using debt for part of the capital requirements of the project.

The APV method aims to do this by calculating separately:
1. The net present value of the project assuming it were all-equity financed.
2. The present value of the tax shield benefits of the proposed debt finance (+/- PV of any other benefits/costs of debt finance).

The APV of the project is the total of these two items.
UK Insolvency law.
A procedure in relation to a company in financial difficulties with a view to securing its survival as a going concern. Or, failing that, to achieving a more favourable realisation of its assets than would be possible on a liquidation or through a voluntary arrangement.
Administration expenses
These encompass the general costs of running the business. For example salaries and related costs of general management including administrative overheads.
Administration order
UK Insolvency law.
An order of the court made in relation to a company in financial difficulties with a view to securing its survival as a going concern. Or, failing that, to achieving a more favourable realisation of its assets than would be possible on a liquidation or through a voluntary arrangement.

While the order is in force, the affairs of the company are managed by an Administrator.
Administrative Receiver
UK Insolvency law.
An insolvency practitioner appointed by the holder of a floating charge over a company's property.
1. UK Pensions.
The person notified to Her Majesty's Revenue & Customs as being responsible for the management of a pension scheme.

2. UK insolvency.
Loosely, an Administrative Receiver.

More generally, a person responsible for day to day administration, in any type of organisation.
American Depository Receipt.
Approved Deferred Share Trust.
An amount of money drawn down under a lending facility.

An amount of money paid before it is legally due.

An increase in the market price of an asset.
Advance Corporation Tax
UK Corporation tax.
A payment which was formerly made to the Inland Revenue whenever a UK company paid a dividend - now abolished.
Advanced Diploma
The full membership qualification of the Association of Corporate Treasurers.
Adverse is the opposite of favourable.

For example in management accounting, adverse variances are bad news, while favourable variances are good news.

Not to be confused with risk averse, which is different.
Adverse event
An adverse event is any event that, happening or having happened, has undesirable consequences.

An adverse event for whatever is under consideration may be neutral or advantageous for something else.

For example, in finance, the term may be relevant with regard to loan contracts that include a "material adverse change" clause. A "material adverse event" may then taken as an event the happening of which would have or may be expected to have a material adverse effect on the obligor's ability to perform its obligations under the loan agreement. The use of the term "adverse event" or "material adverse event" in this context is usually informal, it not often being a defined term in the agreement.
Advising bank
In transactions involving letters of credit (LCs), an institution advising the beneficiary (exporter), of an LC opened in its favour.
Treasury authority which may vary from pure ‘advice’ which local management can ignore if they wish, through to having the authority to set corporate policy, and having effective control over the overall direction of treasury activity.
Advisory netting
Also known as Position netting.
Annual Effective Rate.
Financial maths.
Annuity Factor.
A written statement of fact made for legal purposes under oath before a notary public or other authorised officer.
Accounting - financial assets.
1. Law.
A formal legal relationship between at least two parties in which one, the principal, authorises the other, the agent, to represent his legal interests and to perform legal acts that bind the principal.

A similar less formal relationship which may be legally binding, but which may not, depending on the words and actions of the related parties.

A business or other organisation which facilitates business or other introductions.
For example an employment agency or an estate agency.

4. Behavioural economics.
The ability of individuals to exercise a significant degree of personal control over their own economic and other circumstances, or the psychological belief of an individual that they have such abilities.

5. Treasury authority.
Treasury authority where the day-to-day treasury decisions are made at local level by operational management, but the execution is centralised to obtain efficiencies and economies of scale.
Agency costs
Corporate finance.
Costs for shareholders arising from the agency relationship between the shareholders and the directors and managers of the business owned by the shareholders.
Agency problem
The agency problem refers to the problems which arise when management is separated from ownership.

The main potential problem is that the managers (agents) may not act in the best interests of the owners (for example shareholders).
When managers do not act in the owners' best interests, agency costs will arise.
Agency theory
Corporate finance.
Agency theory states that company directors and managers act on behalf of shareholders as their agents.

An important consequence of agency theory is potential agency costs.
Agency costs can arise when the interests of directors and shareholders are not well aligned, and the directors act in their own personal interests, and not in the best interests of the shareholders.
Any agency costs represent a cost to the shareholders and a loss of value for the shareholders.
A party which acts on behalf of - and with the authority of - another.

2. Tax.
A professional appointed by a taxpayer to deal with the tax authorities on behalf of the taxpayer.
Agent bank
A bank which is responsible for the administration (including interest rate fixing) of a syndicated credit or bond issue, and which represents the lenders collectively in any negotiations with the borrower.

A custody term designating any bank providing custody services on behalf of a custodian for securities traded in the country where the bank is based.
Aggregate demand
Total demand for goods and services in the economy.
Aggregate demand is defined as: Budget deficit + Investment + Consumption expenditure + Balance of trade surplus.
Aggregate money demand
Aggregate demand for goods and services measured in nominal terms.
Aggregate supply
Total supply of goods and services in an economy by firms.
One of the key stages in the preparation of consolidated group accounts. Aggregation is the adding up of the individual assets, liabilities and trading of each of the entities in the group.

The other key stage in this process is the making of consolidation adjustments.
1. Company law.
Annual General Meeting.

Similar meetings in other organisations.
Accrued Interest.
Association of International Bond Dealers, now the International Capital Market Association (ICMA).
Amsterdam Interbank Offered Rate.
A corporation that is limited by shares, and whose shares are traded on a public market.
Asset-liability Management Committee.
Accounting - financial instruments.
A financial asset or financial liability accounted for at fair value through profit or loss.
A set of pre-defined (and often automated) steps for making a calculation or decision.

Algorithms are an essential component of computer programs.
Algorithmic trading
(AT.) Trading supported by computer algorithms, including trading where both the trade decision and the execution of the trade are automated.
Alienation of assets
The risk that a borrower may realise some or all of the assets that form the lender’s security.
All-current rate method
A foreign currency translation method. All items denominated in foreign currency are translated at current exchange rates.

Also called the closing rate method or current rate method.
Company law.
The process whereby a company issues shares to its members, for value.
Asset-Liability Management.
That portion of an investment’s return arising from specific (that is non-market) risk. It is a measure of the difference between the actual return and the expected performance arising from exposure to market risk factors.

Also known as the error term.
Alternate hypothesis
The hypothesis that applies when the null hypothesis is false.
Alternative Investment Market
The London Stock Exchange’s international market for smaller growing companies.
Associate Member of the Association of Corporate Treasurers.
American-style option.
American depository receipt
Certificate of ownership issued by a US bank to investors in place of the underlying corporate shares, which are held in custody.
American-style option
An option which can be exercised at any time up to and including its final maturity.
1. US.
American Stock Exchange (AMEX merged with NYSE Euronext in 2008 and is now incorporated within NYSE Amex Equities).

American Express Company (NYSE: AXP). Global financial services company based in New York.

American Express Company credit card or charge card.
The spreading of a pension scheme surplus or deficit over a period of time, often for the purposes of granting a Contributions holiday (in the case of a surplus) or calculating deficit reduction contributions (in the case of a deficit).

The repayment or reduction of the principal amount of an obligation over time. For example the repayment of loan principal by instalments.

In financial accounting, the writing down of the value of an intangible fixed asset over time. Similar to the depreciation of tangible fixed assets.

More generally, the spreading of any amount or difference over time.

In financial accounting, where there is a difference between the initial amount and the maturity amount of a financial asset or a financial liability, the spreading of that difference over time. The spreading calculation is commonly made using the Effective interest method.
Amortised cost
The amortised cost of a financial asset or financial liability is:

1. The amount at which it was measured at initial recognition - the "initial amount" - usually cost.

2. LESS any repayments of principal.

3. LESS any reduction for impairment or uncollectability.

4. ADD or LESS the cumulative amortisation of the difference between the initial amount and the final maturity amount.
Amortised cost method
Same as the Effective interest method.
Amortising swap
A type of interest rate swap.

Amortising swaps calculate interest on a reducing notional principal amount over the life of the swap, in order to hedge underlying exposures whose principal amount is also reducing.
Used - for example - to hedge a loan being repaid by instalments.
Alternative spelling of Amortisation.
Auction Market Preferred Stock.
Annual adjustment
An adjustment made at the year end to correct errors in the allocation of input tax recovered.
Annual allowance
UK Pensions.
The maximum amount of pension saving an individual can have each year that benefits from tax relief.
This includes pension savings that members make personally plus any pension savings made by someone else on behalf of the member, for example, an employer.

There is no limit on the amount an individual can save in a pension scheme, but there is a limit on the amount that can get tax relief each year.
If a member's pension saving is more than the annual allowance a tax charge is payable on the amount over the annual allowance. This tax charge is called the annual allowance charge.

Annual effective rate
The same as Effective Annual Rate (EAR).

The term AER is more commonly used in the context of investment, though not universally.

The term EAR is more commonly used in the context of borrowing.
Annual effective yield
Near enough the same as Effective Annual Rate.
Annual equivalent rate
Also known as Effective annual rate.
Annual exempt amount
UK Capital gains tax.
The total amount of capital gains that an indvidual can enjoy each year without having to pay capital gains tax on them.

Sometimes known as the Annual tax-free allowance.
Annual General Meeting
1. UK company law.
A meeting of company members required to be held each year.

Similar meetings in other organisations.
Annual interest
1. UK tax.
Interest which is not short interest for UK tax purposes.
Among other criteria, the loan to which the interest relates had to be able to last more than one year.
This tax distinction was abolished with effect from 2006.

Interest paid once per year.

The total amount of interest per year, including situations where the interest is paid with a different frequency than once per year.
Annual Investment Allowance
UK tax - capital allowances.
An accelerated (100%) writing down allowance for a restricted amount of eligible capital expenditure per annum.
For example £250,000 per annum from 1 January 2013 to 31 December 2014.
Annual percentage rate
A legally defined consistent basis for quoting and comparing retail rates of return and interest payable (especially interest payable).

Similar to the effective annual rate.
Annual report
1. Financial reporting.
The complete document produced by a company (or other reporting entity) each year. It includes the complete set of financial statements and other matter required under company law and relevant accounting practice together with - for companies with listed securities - relevant securities law and regulation, listing regulations, and other relevant regulations.

Sometimes known as the Report and accounts.

Any other report produced once per year.
Annual return
1. UK company law.
A formal document that UK registered companies are required by law to send to the Registrar of Companies, each year.

More generally, any other similar report containing financial or other information.
A series of equal future periodic cash flows, starting at Time 1 and ending at a predetermined future Time n.

More generally, any series of future periodic cash flows, either equal in amount or growing at a fixed compound rate per period, starting at a future time or already in payment, and usually ending at a later future time.

Any financial arrangement in which a periodic income is paid to an individual, often as a pension.

An insurance contract purchased from a life assurance company that pays an income in exchange for a lump sum.
There are many variations on such annuities, depending on the nature of the income stream.
Annuity due
An annuity in which each of the cash flows is paid in advance (at the start of each period).
Annuity factor
Financial maths.

Annuity factors are used to calculate present values of annuities, and equated instalments.

A method for calculating the total present value of a simple fixed annuity.
Mathematically, the Annuity Factor is the cumulative Discount factor for maturities 1 to n inclusive, when the cost of capital is the same for all relevant maturities.

Commonly abbreviated as AF(n,r) or AFn

Also known as the Present Value Interest Factor of an Annuity (PVIFA).

Present value calculation
The present value of the annuity is calculated from the Annuity Factor (AF) as:
= AF x Time 1 cash flow.

Example 1
Annuity factor = 1.833.
Time 1 cash flow = $10m.
Present value = AF x Time 1 cash flow
= 1.833 x 10
= $18.33m

Annuity factor calculation
The annuity factor for 'n' periods at a periodic yield of 'r' is calculated as:
AF(n,r) = (1 - (1+r)-n) / r

n = number of periods, and
r = periodic cost of capital.

Example 2
When the periodic cost of capital (r) = 6%
and the number of periods in the total time under review (n) = 2, then:

Annuity factor = (1 - (1+r)-n) / r
= (1 - 1.06-2) / r
= 1.833

This figure is also the sum of the two related Discount Factors:
AF2 = DF1 + DF2
= 1.06-1 + 1.06-2
= 0.9434 + 0.8900
= 1.833

Annuity factors are also used to calculate equated loan instalments.
For a loan drawn down in full at the start, the equated loan instalment is given by:
Instalment = Principal/Annuity factor

Example 3
$20m is borrowed at an annual interest rate of 6%.
The loan is to be repaid in two equal annual instalments, starting one year from now.

The annuity factor is 1.833 (as before).
The loan instalment is:
20 /1.833
= $10.9m

The Annuity Factor is sometimes also known as the Annuity formula.
Annuity formula
Financial maths.
The present value of an annuity calculated using an annuity factor as:

= AF x Time 1 cash flow.
Annuity ordinary
An annuity in which each of the cash flows is paid in arrears (at the end of each period).
This is the usual case, so that such a pattern of cash flows is more commonly called simply an annuity.
Dr Igor Ansoff, originator of the Product Market Matrix (PMM) analysis model.

The PMM model itself.
Ansoff's matrix
Strategic analysis.
The Product Market Matrix strategic business analysis model.
Tax rules and other initiatives introduced by governments and/or tax authorities to combat and discourage the avoidance of tax.
Anti-avoidance provision
A rule introduced by governments and/or tax authorities to combat the avoidance of tax.
The intention of anti-avoidance provisions is to make attempted tax avoidance ineffective for tax purposes.
Anti-avoidance rule
Anti-avoidance provision.
An increased likelihood for people to take out insurance contracts where they believe their particular risk is higher than the insurance company has allowed for in calculating its premiums.
Antitrust law
Laws that discourage monopoly and restrictive practices and encourage greater competition.
In the UK known as competition law.
Single Euro Payments Area.
Additional Optional Services.
Accounts Payable.
Also known as Payables.

Sometimes written as A/P.
The former Association of Payment Clearing Services.
Now renamed UK Payments Administration Ltd (UKPA).
1. UK.
The former Auditing Practices Board, now replaced by the Audit and Assurance Council.

2. US.
The former Accounting Principles Board, now disbanded. It was replaced by the Financial Accounting Standards Board.
Asset Purchase Facility.
Average Price Option.
To allocate a money amount on a time basis.

For example total profits of EUR 100,000 for a period of one year (365 days) consisting of a one month (30 days) period and an 11 months (335 days) period would be time-apportioned as follows:

One month period:
100,000 x 30 / 365
= EUR 8,219

11 months period:
100,000 x 335 / 365
= EUR 91,781

(This is also known as 'time-apportionment'.)

To allocate a money amount on any other systematic basis.
For example, to allocate the total costs of a shared building on the basis of floor areas.

To allocate any amount on a systematic basis.
An increase in the value of a currency.

An increase in the value of any asset.
In administrative law, the allocation of a sum of money to a particular purpose.
Approved deferred share trust
A type of employee stock ownership plan enjoying approval by the UK Tax Authorities.
Approved scheme
UK Pensions and tax.
A retirement benefit scheme approved by Her Majesty's Revenue & Customs (HMRC) in the UK, and thus qualifying for certain advantageous tax treatments.

One of a number of employee share schemes approved by HMRC, similarly qualifying for preferential tax treatment.
The use of estimation techniques to provide a rough calculation - sufficiently accurate for the given purpose - of a financial or other measure.

An expression in simpler or more rounded terms of a known financial or other measure, sufficiently accurate for a specified purpose.
Annual Percentage Rate.
Assured Payment System.

2. US.
Auction Preferred Stock.
Arbitrage Pricing Theory.

Automated Pit Trading.
Adjusted Present Value.
Accounts Receivable.
Also known as Receivables.

Sometimes written as A/R.
Arab Bank for Economic Development in Africa
A financial institution funded by the governments of the member states of the League of Arab States.
In a broad sense, arbitrage means identifying discrepancies between quoted market prices, and then dealing simultaneously in the related market instruments to earn profits free from the risk of changes in market prices.

The simplest theoretical form of arbitrage activity would be to deal simultaneously in two identical instruments at two different market prices.
In practice such simple arbitrage opportunities are very rare. More commonly, arbitrage activities involve dealing in equivalent combinations of larger numbers of different instruments.

A market participant who takes advantage of arbitrage opportunities is known as an arbitrageur.
Under efficient market conditions, the activities of arbitrageurs and other market players create supply and demand pressures in the market which act to eliminate temporary pricing discrepancies.

Many valuation and pricing models are based on ‘no arbitrage’ assumptions. In other words, the valuation models assume that all pre-existing arbitrage opportunities in the market have been identified and eliminated. So that it is now possible to predict the values and market prices of traded instruments by calculating them from other related market prices.

Defined more narrowly, arbitrage means the purchase of securities in one market and the simultaneous sale of the same or equivalent securities in the same or related markets. This is in order to earn immediate profits from a temporary price differential within a market or between related markets.
A market participant who takes advantage of arbitrage opportunities.
Arbitration clause
Contract law.
A term of a contract constituting an agreement to refer disputes arising out of the contract to arbitration.
Accounts Receivable Conversion.

2. US.
Adjustable rate consumer loan.
Financial reporting.
Accounting Reference Date.
1. Maths.
A variable input to a maths function which drives the result of the maths function.

For example the function Profit = Revenues LESS Costs has two arguments, namely Revenues and Costs.

2. Computing.
A variable input to a computer function which drives the result of the computer function.

For example the Excel function =ROUND(number, num_digits) also has two arguments, namely the number which is being rounded off and the number of decimal places to which the number is to be rounded.
Arithmetic mean
The arithmetic mean of a set of data is the simple average calculated by adding up all of the values and dividing by the total number of items.

For example, the arithmetic mean of 4%, 5% and 6% is:
= (4% +5% +6%)/3
= 5%.

Also sometimes known as the Mean.

Sometimes denoted by 'µ' - the Greek letter mu (or m).
Adjustable Rate Mortgage.
Arm’s length principle
When a transaction between two related or affiliated parties is conducted (and priced) as if they were unrelated, so that there is no question of a conflict of interest (or of tax avoidance).
Arm’s-length price
The price at which a willing seller and an unrelated willing buyer will freely agree a transaction.
Average Rate Option.
Adjustable Rate Preferred Stock.
Accounting Rate of Return.
Arrangement fee
A front-end fee normally charged by a lead bank for arranging a syndicated credit.
Occasionally a lender may seek to charge a similar fee in a bilateral arrangement, depending on market conditions.
Articles of Association
UK company law.
This is the formal document that explains the internal organisation of a UK company.

The Articles of Association are filed along with the Memorandum of Association when registering a company.
Accounting Standards Board.

Actuarial Standards Board.
American Standard Code for Information Interchange.

(Not to be confused with ASCI, which is different.)
Association of Southeast Asian Nations.
Asian option
A type of option where the amount that needs to be repaid is determined by the underlying asset’s average value over a specific period of time.
Ask rate (also known as offer rate).

Ask price
The offered (selling) price of traded securities or other instruments, such as the price which a buyer would be expected to pay.
Ask rate
Near enough the same as offer rate.
Application Service Provider.
1. UK tax.
A formal statement, issued by HMRC, of an amount of tax payable.

Any evaluation, particularly an evaluation of an amount of taxation or of another money amount.
Asset backed commercial paper
Commercial paper secured by specified bundles of assets. For example mortgage loans, consumer loans, car loans and the like.

Frequently issued by special purpose vehicles to fund the investment in those assets.
Asset backed finance
Borrowing secured by specified assets or bundles of assets which generate a regular series of cash flows. Underpinning assets include mortgage loans, consumer loans and car loans.
Asset beta
The beta value for the securities issued by a company which can be observed incorporates both financial and business risk.

The asset beta is calculated from the observed beta; to reflect the beta value which would be observed if the company were all equity financed. It is therefore indicative of the business risk of the company.

The asset beta is also called the ungeared beta.
Asset cover
A ratio of tangible assets to debt. Loan covenants often require a minimum asset cover to protect the lender's security.
Asset finance
A source of funding which is secured, or effectively secured, against assets.
Asset purchase facility
An arrangement established in January 2009 under which the Bank of England is authorised to buy high-quality private sector assets including:
- corporate bonds,
- securities issued under the Credit Guarantee Scheme,
- syndicated loans and
- asset-backed securities created in structures acceptable to the Bank.
Asset risk
1. Pensions.
The risk of adverse effects resulting from,
(i) losses in the market values of assets invested in by a pension fund, or
(ii) worse than expected investment returns from those assets.

Similar risks for any other organisation which has part or all of its funds held in the form of investment assets.
Asset value
The value of an asset in the accounts of a company.

The value of a business determined by estimating the value which might be obtained by selling the assets (as distinct from selling the business as a going concern).
This use of the term originally meant literally selling assets; now it is as likely to mean selling the component businesses of a group as separate assets.
Asset-based swap
An interest rate or cross-currency interest rate swap entered into by a party to convert the coupon on an asset to another rate or another currency rate basis.
Asset-liability management
An approach to risk management which analyses an organisation's assets and liabilities as a combined portfolio.

Asset-liability management is particularly concerned with the management of market rate risk, including interest risk, taking account of the expected impact of interest rate changes both on assets and on liabilities.
It also takes account of the relationships between the expected impact on the assets and the expected impact on the liabilities.
1. Financial accounting.
Possessions or resources owned or controlled by the reporting entity as a result of past events and from which future economic benefits are expected to flow to the reporting entity.

More generally, possessions or resources (whether or not owned by a financial reporting entity).
The formal process by which a right or contract is transferred from one party to another.
Financial accounting.
An investment is classed and accounted for as an associate (or associated undertaking) when:

(i) the investor exercises significant influence over the operating and financial policies of the other entity, which is normally through holdings of over 20%, but less than 50%; and

(ii) that other entity is not a subsidiary undertaking and the investment does not constitute an interest in a joint venture.
Associated company
UK tax.
A company which is either under common control with another company, or where one company controls the other.
Associated undertaking
UK Group accounting.
An undertaking in which another undertaking included in the consolidation has a participating interest, and over whose operations and financial policy it exercises a significant influence, and which is not a subsidiary or a joint venture.
Association of Corporate Treasurers
Formally The Association of Corporate Treasurers, a membership body and global provider of treasury education.

Re-established by Royal Charter of incorporation on 1 January 2013, it was originally a company limited by guarantee formed in the UK in 1979.

The ACT is established in the public interest to be the leading professional body for international treasury.

It provides the widest scope of benchmark qualifications for those working in treasury, risk and corporate finance. It defines relevant standards, promotes best practice and supports continuing professional development.

Details of the ACT's work can be found at:
Assured payment system
An arrangement in an exchange-for-value system under which completion of the timely settlement of a payment instruction is supported by an irrevocable and unconditional commitment from a third party (typically a bank, syndicate of banks or clearing house).
Asymmetric encryption
Public key encryption.
Algorithmic Trading
At the money
An option is at the money when immediate exercise of the option would result in neither a gain nor a loss.
This is when the underlying asset price is equal to the strike price of the option.

A derivative such as a swap is at the money when, for example, the swap rate is equal to the relevant current market rate, so that the net present value of the derivative is Nil.
Automated Teller Machine.

At The Money.

3. Netherlands.
Amsterdam Treasury Bond Market.
Automated Trading System.

Automatic Transfer Service.
Attained age method
Pensions funding.
An example of a projected benefits funding method.
Attributable profit
Financial accounting.
The concept of attributable profit relates to accounting for long-term contracts. Long-term contracts being ones which have not yet been completed, as at the accounting date.

The idea is to spread the total profit for the contract appropriately across the different accounting periods, for example a company's accounting years. This is achieved by booking an appropriate proportion of the total profit for the contract, in each year.
This appropriate proportion of the total profit is based on the attributable profit.

Attributable profit is defined as that part of the total profit currently estimated to arise over the duration of the contract, that fairly reflects the profit attributable to the work completed to date, as at the accounting date.
In calculating the total profit, allowance is also made for estimated remedial and maintenance costs and increases in costs, so far as they are not recoverable under the terms of the contract.
SWIFT currency code for the Australian Dollar.
1. Financial reporting.
The financial auditor’s primary role is to form and report an independent opinion on the truth and fairness of primary financial statements.

In a broader sense, auditing refers more generally to the process of independent reviewing and reporting on financial and non-financial information.
Audit and Assurance Council
Considers and advises the Board of the Financial Reporting Council and its Codes and Standards Committee on audit and assurance matters.

The duties of the former Auditing Practices Board are now undertaken by the Audit and Assurance Council.
Auditing guidelines
These are issued by the Auditing Practices Board in the UK and give guidance to external auditors, but they are not mandatory.
Auditing Practices Board
Former UK body which was part of the Financial Reporting Council.
The former APB's duties are now undertaken by the Audit and Assurance Council.
Auditing standards
UK auditing standards are prescriptive rules for external auditors on all audits.
Auditors’ report
A required constituent of a company’s annual audited accounts.

The auditors’ report states the financial information has been audited, it states the respective responsibilities of auditors and directors and gives the basis for the audit opinion and the opinion itself.
The opinion will relate – among other things - to whether the accounts present a true and fair view of the state of affairs of the company (or other entity being reported on).

A report of auditors about any other document or any other matter.
A key control in treasury. Authorisation needs to be provided for all transactions in treasury and given only by a small number of people with the appropriate (seniority) qualifications.

The individuals with power of authorisation should be listed in a document also specifying the various transactions that can be authorised, procedures for controlling authorisation, etc.
Authority limits
Limits set by treasury to the number of dealers allowed to carry out transactions, the value of the transactions they can execute and the number of people giving authorisation.

More generally, limits can also be applied to the financial risk that a company or organisation is willing to bear. Limits can, for example, be set for the proportion of foreign exchange exposures and the time period within which they should be hedged.

The company/organisation may also, for liquidity reasons, limit the types of deals that it wants to have transacted. Another area of authority limit concerns the level of counterparty credit exposures resulting from deals such as those in derivative products.

In some exceptional situations, the dealer may have to exceed the risk and authority limits set by the management. In such cases, it is essential for the dealer to have the transaction approved by the relevant responsible manager.
Automated clearing house system
A domestic electronic clearing system in which payment orders are exchanged among financial institutions, primarily via magnetic media or telecommunication networks, and handled by a data-processing centre.
Automated clearing settlement system
Low value transfer system.
Automated teller machine
An electromechanical device that permits authorised users, typically using machine-readable plastic cards, to withdraw cash from their accounts and/or access other services, such as balance enquiries, transfer of funds or acceptance of deposits.

ATMs may be operated either online, with real-time access to an authorisation database, or offline.
Cash management.
The date when funds deposited with a bank or other financial institution will become available for use.

The time lag in days before funds will become available for use.
Available balance
Cash management.
The amount of funds available for withdrawal from an account.
Accounting - financial assets.
(AFS). A classification of financial assets - for example the shares or debt of non-group companies - for financial assets which do not fall into any of the following other categories:

- A financial asset or financial liability at fair value (ALFV);
- Held-to-maturity investments (HTM); or
- Loans and receivables (LR).
A third party guarantee of payment on a bill of exchange or promissory note.
Additional Voluntary Contribution(s).
Average effective maturity
A calculation of the maturity of a bond taking account of any potential early redemption.

A calculation of the weighted average of the maturities of bonds in a portfolio, which includes all adjustable coupons, mortgage prepayments and puts.
Average life
The weighted average maturity of a loan, bond or security - after taking into account amortisation provisions.
Average maturity
Portfolio analysis.
The amount of time needed for all securities held in a portfolio to reach maturity, weighted by the amount of assets invested in each security.
Average nominal maturity
Portfolio analysis.
As opposed to average effective maturity, average nominal maturity does not take account of a potential early call, adjustable coupons, mortgage prepayments and puts.
Average total cost
Management accounting.
Total cost divided by output.
Average weighted maturity
Portfolio analysis.
A calculation of the weighted average of the maturities of fixed income instruments held in a portfolio.
Average weighted maturity is correlated to the risk profile of the portfolio, for example, longer Average Weighted Maturity implies greater price volatility.

Also known as Weighted Average Maturity.

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