Glossary of Terms

Abbreviation for Business to business.

Abbreviation for Business to customer.

Abbreviation for Banker's Acceptance.

Compensation practice of banks in some jurisdictions where debits to a customer’s statement of account will reflect a date prior to the actual outflow of funds.

See Back value date.

1. A mechanism under which two parties lend each other matching sums on matching terms in different currencies or on a different interest rate basis, with the objective of obtaining a cost advantage or of hedging currency or interest rate risk.

2. A similar arrangement undertaken for any other purpose.

Abbreviation for Bankers' Automated Clearing Service. A funds transfer system.

Accounting. An item in the income statement of a reporting entity, reflecting the total amount of losses from irrecoverable trade receivables during the accounting period under review.

Accounting. An item in the balance sheet of a reporting entity, reflecting the estimated amount of total trade receivables which are expected to be irrecoverable.

In accounting terms, bad debts are a potential source of overstatement of assets as a result of credit customers being unable to pay their debts to the company.

In commercial terms, bad debts are a potential source of losses.

Tax. The six elements which identify whether or not trading is taking place for tax purposes.

Banking. Information on current ledger and collected balances, one and two-day float, debit and credit detail, and adjustment items. Average balances and a balance history may also be reported.

A pension scheme where the beneficiary makes a defined contribution (usually a percentage of Pensionable Salary) and the main sponsor pays the remainder of the (unknown) cost of providing the benefits. Most UK Defined Benefit pension schemes have historically been of this type.

A financial statement prepared for a country summarising the flow of goods, services and funds, inwards and outwards, between the residents of that country and the residents of the rest of the world during a particular period.

The level of a country's exports minus imports. A trade surplus is where exports exceed imports. A trade deficit is where imports exceed exports.

One of the primary statements of a company’s financial accounts. The balance sheet lists the assets, liabilities and shareholders’ funds at the balance sheet date.

Tax. An adjustment arising on the disposal of an asset for UK capital allowance purposes.

UK tax. Capital allowances adjustments arising on the disposal of certain individual fixed assets where the sale proceeds are less than the balance of unrelieved expenditure (TWDV).

UK tax. Capital allowances adjustments arising on the disposal of certain individual fixed assets where the sale proceeds exceed the TWDV or where there is a negative value in the general capital allowances pool.

A final repayment of a loan or bond which is substantially larger than any previous amortised payment.

A cheque drawn by a bank on itself. The cheque is purchased by the payor and sent to the payee, who presents it to its bank for payment. That bank presents it to the payor’s bank for reimbursement.

A draft drawn by a bank on itself. The draft is purchased by the payor and sent to the payee, who presents it to its bank for payment. That bank presents it to the payor’s bank for reimbursement.

Time during which a remittance in the banking system is available neither to the payer nor to the payee.

The central banking authority in the UK.

A comprehensive approach to managing important banking relationships, covering both credit and non-credit services.

A remittance process whereby a payer may make a payment at any branch of any bank for the account of a payee at any branch of the same or any other bank. Also called credit transfer or direct transfer.

(BA). A bill of exchange (draft) which has been accepted by a bank.
A draft accepted by a bank constitutes an unconditional and binding obligation on the part of the bank to pay the draft at maturity.

Payment order issued by a bank on behalf of its customer, whereby the recipient looks to the bank for settlement, thus minimising credit risk for the recipient.

Same as Costs of financial distress.

A chart where the quantity of an item is represented by the height of a bar.

Obstacles which prevent a new firm from entering a market. Barriers may include natural, legal or artificial barriers.

The base currency in a foreign exchange rate quotation is the currency which there is one of.

For example in the quotation 1 GBP = 1.4600 USD, the base currency is GBP; meaning one British pound is exchanged for a variable number of USD, depending on the rate quoted.

Also known as the Reference currency or the Fixed currency.

A widely recognised and quoted interest rate - such as the Fed funds rate, the prime rate, or the London Inter Bank Offered Rate (LIBOR) - by reference to which a rate of interest is calculated.

For example, ‘LIBOR plus 50 basis points’.

An agreement developed by the Basel Committee on Banking Supervision to promote international standards for measuring the adequacy of a bank's capital.

The flat rate pension (in the UK) paid to all who have met the minimum National Insurance Contribution requirements and reached the statutory retirement age.

1. The method or convention under which a value or price has been calculated.

2. See Basis risk.

One hundredth of 1% = 0.01% = 0.0001 as a decimal.

See basis point.

Basis risk means the risk of an unfavourable change in the relationship between the price of a derivative and the market value of an underlying asset or liability being hedged. For example resulting in a smaller profit being enjoyed on a hedging derivative, than the loss suffered on the underlying exposure. Good hedge design therefore seeks to eliminate or minimise basis risk in the hedged position, so far as practicable.

A swap that exchanges two floating interest rates, each being calculated on a different basis. For example, 3-month LIBOR against 6-month LIBOR, or LIBOR against Prime.

The use of a basis swap for hedging is to transform a borrowing or deposit with interest calculated on a particular basis, into a synthetic liability or asset with interest effectively calculated on an alternative basis. This alternative interest basis being considered preferable by the hedger.

The transmission or processing of a group of payment orders and/or securities transfer instructions as a set at discrete intervals of time.

Abbreviation for British Bankers’ Association.

Business contingency management. Same as disaster recovery planning.

An investor or trader who takes the view that market prices are likely to fall and sells securities hoping to make a profit by subsequently buying at a lower price. Hence 'bear market' describes a market which is on a trend of falling prices.

1. A composite speculative deal in two options, which results in a profit/loss profile similar to a conventional put option, except that the upside potential is capped in return for a reduction in the net premium payable. A bear spread can be constructed using put options by buying a put with a given strike price, and selling an otherwise identical put with a lower strike price. It can also be constructed using appropriate call options.

2. A composite transaction in two options plus an underlying asset or other exposure, resulting in the same profit/(loss) profile as the deal described in 1. above.

Description of a Bearer instrument.

A valuable document, which does not bear the name of its legal owner and may be redeemed by whoever is in possession of it. Bearer instruments are not registered to the holder, and can therefore be transferred by delivery.
Also known as a bearer security.

The same as a Bearer instrument.

The practice of comparing performance of a business or investment operation, typically against a best practice standard in a given field, industry, or investment asset class.

(BIK). A benefit - usually taxable - received by an employee due to their employment.

Pensions. The main administrative body within the UK Department for Work and Pensions, responsible for ascertaining the entitlement of individuals to State pension benefits and for making such pension benefit payments.

Abbreviation for Break even point.

See Bermudan-style option.

An option which can be exercised only on pre-specified dates up to its maturity. So Bermudan options’ characteristics are part-way between European-style and American-style options in respect of their exercise dates.

The term derives from Bermuda's geographical location 'part-way' between Europe and America.

A measure of market risk.

Beta can refer to the market risk for a single financial asset or to an entire portfolio. By definition, the beta of the whole market is one.

Therefore a beta of greater than 1 means that, on average, the asset will increase in value by more than the market when the market is rising – and reduce by more than the market when the market is falling. An asset with a beta less than 1 will increase and reduce in value by less than the market.

Abbreviation for Bond Equivalent Yield.

A form of guarantee by a bank or insurance company to a potential customer against a tenderer's failure to sign a contract in accordance with the terms of the tender.

The price at which market makers are willing to buy currencies or other traded assets.

The same as Bid-offer.

Bid offer prices (or bid-ask prices) are quoted by market makers simultaneously as the prices at which they will deal with the market either to buy or to sell.

Spread means the difference between the bid price and the offer price. The greater the spread, the greater the market maker’s compensation for their work and risk in making the two way price; and the greater the all-in transaction cost for the price taker.

The difference between the prices at which market makers (such as banks and other foreign currency dealers) are willing to buy and sell currencies or other traded assets.

Benefit in Kind.

Involving two parties only. For example, a bilateral loan is a loan agreement between one lender and one borrower.

A settlement system in which participants’ bilateral net settlement positions are settled between every bilateral combination of participants.

An arrangement between two parties to net their bilateral obligations. The obligations covered by the arrangement may arise from financial contracts, transfers or both.

For example purchases between two subsidiaries of the same company may be netted against each other so that over time, typically one month, only the net difference is transferred.

Bills of exchange are widely used to finance trade and, when discounted with a financial institution, to obtain credit.

The formal legal definition of a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain sum in money to order or to bearer.

Expressing this in less formal language, it is a written order from one party (the drawer) to another (the drawee) to pay a specified sum on demand or on a specified date to the drawer or to a third party specified by the drawer.

Document signed by a freight carrier to show receipt of goods for transportation.

Binomial probability distributions assume that at any one time there are only two possible outcomes. For example a fixed percentage size jump up or jump down in the market price of an asset. A binomial tree or binomial lattice can then be built up from a series of binomial outcomes, to model asset prices or other variables over longer periods.

A discrete probability distribution that applies when an experiment is conducted n times with each trial having a probability p of success and each trial is independent of every other trial.

An option pricing model which assumes a binomial tree of possible underlying asset market prices.

See Binomial.

The Black Scholes option pricing model is an example of a risk-neutral valuation model. It models the value of European-style options on non-dividend paying assets, based on the underlying price, the strike price, the underlying volatility, the time to expiry and the risk-free rate of return.

Endorsement of a negotiable instrument without naming the person to whom it would be paid.
(Also known as Endorsement in blank.)

VAT. Input tax that can never be recovered, for example Input tax on business entertaining.

The UK City Code on Takeovers and Mergers.

The managers of a company elected by the shareholders or members.

Latin term referring to persons or actions that are in good faith and honest.

1. A marketable longer-term debt instrument usually administered by a trustee. Bonds typically require the issuer to repay the amount borrowed plus interest over a designated period of time. The current market yield on the bond is both the market rate of return to the debt investor and the pre-tax market cost to the issuer of debt capital. Issuers of bonds include a wide range of corporate and public sector entities, including central governments.

2. A guarantee provided by one party to another as part of a contract.

3. An amount of money provided as security for a guarantee.

4. An instrument issued by a bank or an insurance company, in favour of a buyer, on behalf of a supplier, as additional assurance to the buyer that the supplier will perform its obligations under the supply contract. Such a bank bond or insurance company bond will be supported by an indemnity issued by the supplier in favour of the bank or insurance company.

The method used to calculate accrued interest in the eurobond market using a 360 day year of twelve 30 day months (known as 30/360).

(BEY). A conventional basis of short term yield quotation, which counts Actual days per 365 day conventional year.

Bond futures are an example of long term interest rate futures.

They are derivative contracts whose price is related to the market price of a specified reference bond.

A specialised Trust deed used in a bond issue.

1. An issue of bonds.

2. A term to describe all of the bonds issued at the same time, under the same terms.

A distribution of free shares to shareholders based on existing shareholdings.

An abbreviation for Book value.

1. Any provision in a company's financial accounts.

2. A provision in a company’s accounts for a future pension benefit liability for which no funds have been set aside. Book reserves are commonly encountered in countries such as Germany.

The value as recorded in a company’s books, in other words its accounts including its published balance sheet. Historically the book value of an asset was normally its original cost less any depreciation or other write-down in value. This is distinct from market value, the fair market price which the asset might be expected to raise if offered for sale.

More recently, accounting practice has been moving toward a system of book valuation which is aligned more closely with market values.

1. To calculate zero coupon yields from given par yields for the same maturities of funds.
2. More generally, to calculate any yield curve from another given yield curve for the same maturities.
3. To undertake any calculation process where the results from earlier calculations are inputs to subsequent calculations.
4. See Bootstrap effect.

The short-run increase in earnings per share which occurs in a share for share exchange when a company trading on a higher price to earnings ratio acquires a company trading on a lower price to earnings ratio.

See Bootstrap.

A new issue procedure for securities whereby one or more lead managers commit to underwrite an entire offering of securities on agreed terms, rather than offering to place the issue on a best efforts basis.

An abbreviation for Basis point.

Abbreviation for Business process re-engineering.

Failing to perform any term of a contract, written or oral, without a legitimate legal excuse.

1. (BEP). The number of units of production at which contribution is equal to total fixed cost, in other words this is the level of production at which a producer will neither earn a profit nor make a loss.

2. The market price at which a strategy results in neither a profit nor a loss.

3. A point - however measured - at which two alternative strategies give the same result. It is therefore the point of indifference between two choices or strategies, for example two trading strategies each resulting in the same expected profit. So when the breakeven point is crossed, the optimum decision or choice will change.

See Break even point.

Same as Liquidation value.

See Break even point.

A market intermediary who brings together buyer and seller for a commission paid by the initiator of the transaction or by both sides. The broker does not take market positions itself.

Abbreviation for Business Service Provider.

1. Any plan expressed in monetary terms.

2. The level of taxation minus government spending. A budget surplus is where taxation exceeds government spending. A budget deficit is where government spending exceeds taxation.

3. A formal statement - normally made annually - by the UK Chancellor of the Exchequer setting out the government's taxation proposals for the next fiscal year.

A graphical representation of the amounts an individual can buy of two alternative goods, given his income and the prices of the goods.

See retail funds transfer system.

Pensions. The transfer of pension liabilities (and usually an equivalent value of assets), relating to a group of members, from one pension scheme to another. Such transfers often arise in connection with merger and acquisition activity.

An investor or trader who takes the view that market prices are likely to rise and buys securities hoping to make a profit by subsequently selling at a higher price. Hence 'bull market' describes a market which is on a trend of rising prices.

1. A composite speculative deal in two options, which results in a profit/loss profile similar to a conventional call option, except that the upside potential is capped in return for a reduction in the net premium payable. A bull spread can be constructed using call options by buying a call with a given strike price, and selling an otherwise identical call with a higher strike price. It can also be constructed using appropriate put options.

2. A composite transaction in two options plus an underlying asset, resulting in the same profit/(loss) profile as the deal described in 1. above.

A sterling denominated bond issued by a foreign borrower in the UK domestic market.

Repayment of a loan or bond in a single lump sum at final maturity, without amortisation.

Activities undertaken for the purpose of earning profits.

Larger businesses are normally undertaken by companies. Smaller and medium-sized businesses are more commonly undertaken by sole traders or by partnerships.

(BCM). Same as disaster recovery planning.

The purpose, strategy and trading practices of a business.

(BPR). An approach to business analysis and development which seeks improvements by adopting a 'clean sheet' approach, without preconceptions.

1. In the Capital Asset Pricing Model this term is used to mean the ungeared beta of the business. Because it is ungeared it represents the overall risk (beta) of the business with its element of financial risk removed. Risk in this CAPM context is defined narrowly to mean the correlation between movements in the company's share returns and the returns to the overall market.

2. The term is also used more broadly to refer to the set of risks taken by a business in seeking to operate in a normal competitive environment; launching a new product or investing in new equipment. These decisions are risky and they may or may not result in the expected reward, they may even result in extreme cases in the demise of the business. Many firms attempt to limit the scale of this risk by restricting the range of their business to their core competences.

Same as operating unit.

A form of export finance under which the Export Credit Guarantee Department's (ECGD's) unconditional guarantee to a bank in the UK enables that bank to make a loan to the overseas customer of a UK exporter, which in turn enables that customer to pay the exporter on cash terms of payment.