Glossary of Terms

Depreciation.

The daily rate of interest (or yield) is a quoting convention for the simple interest nominal annual rate for compounding once per day.

For example, if the quoted daily rate is 5.11%, the amount of interest compounded daily is 5.11%/365 = 0.014%.

Not to be confused with the annual effective rate, which in this case would be 1.00014³⁶⁵ - 1 = 5.24%.

A sum of money paid in compensation for loss or injury. Usually under the terms of a contract, or following a legal action.

An arrangement in which a financial institution or a third-party reporting service gathers and consolidates account balances and transactions from various financial institutions with which the company has accounts.

Statistics.
Ways of illustrating statistical results.

1. The number of days within a specific interest payment period in which interest payments are due.

2. The convention governing the way such interest payments are to be calculated (for example, 360/365 days).

Credit transfer.
An intra-day exposure of a bank when account is in an overdraft position at any time during the business day vis-à-vis credit extended for a period of less than one business day.

Daylight credit may be extended by central banks to even out mismatches in the settlement of payments.

In a credit transfer system with end-of-day final settlement, daylight credit is tacitly extended by a receiving institution if it accepts and acts on a payment order even though it will not receive final funds until the end of the business day.

Also known as Daylight overdraft, Daylight exposure, or Intra-day credit.

Also known as Daylight credit.

Also known as Daylight credit.

Also known as Days sales outstanding.

(DRO). The same as Days sales outstanding.

(DSO). A credit measurement ratio calculated by dividing accounts receivable outstanding at the end of time period by the average daily credit sales for the period.

For example, if accounts receivable = EUR 50m; and
Daily credit sales = EUR 2m

Then Days sales outstanding = EUR 50m/EUR 2m = 25 days.

Based on annual total sales - or total sales for any other period - the calculation is modified appropriately for the length of the time period in days (for example 365 days per year).

For example given annual credit sales = EUR 730m (and accounts receivable = EUR 50m as before):
Days sales outstanding = EUR 50m/EUR 730m x 365 days
= 25 days (as before).

Also known as Days billing outstanding (DBO) or Days receivables outstanding (DRO).

Pensions.
Defined Benefit pension scheme.

Days Billing Outstanding.

Pensions.
Defined Contribution pension scheme.

Discounted Cash Flow.

Dividend Discount Model.

One who acts as a director without having been formally appointed as one. De facto directors can become legally liable as if they were directors.

The maximum amount to which a person will be liable.

A legal term implying that a matter is trivial and it is not appropriate to pursue it.

UK VAT.
£625 per month on average or half the total input tax in the period.

UK Tax.
A chargeable gain levied on a company which leaves a chargeable gains group following a previous tax sheltered inter group transfer.

The date on which a deal is struck.

A specialist in a bank or company who is authorised to undertake foreign exchange transactions.

A certificate of indebtedness in which a company acknowledges indebtedness for a specified sum on which interest is due until the principal is paid back.

(DR).
1. In relation to a bank account, a debit balance is one which stands in favour of the bank. The customer owes money to the bank. Also known as an overdrawn balance. (Contrasted with a credit, or positive, balance.)

2. An item drawn out of an account, or charged against the account.

3. In double entry book-keeping, every accounting transaction is recorded with both a Debit entry and a Credit entry in the accounting records.
Debit balances represent assets or expenses (while Credits represent liabilities, capital or income).

4. In double entry book-keeping a Debit entry is one made:
- To increase a debit balance; or
- To reduce a credit balance.

For example, the book-keeping entry to recognise a cash sale is:
DR Bank
CR Income

If the bank balance is already an asset (DR balance in the account holder's records), the DR Bank accounting entry for the receipt will increase the positive bank balance (asset) in the balance sheet.
But if the bank balance is currently overdrawn, then the DR Bank accounting entry for the receipt will reduce the overdrawn bank balance (liability) in the balance sheet.

1. Financial accounting.
In financial accounting a debit balance is an asset within the balance sheet, or an expense within the profit and loss account (or income statement).

2. Banking.
In banking a debit balance - in the bank's records - is one which stands in favour of the bank. The customer owes money to the bank. Also known as an overdrawn balance.
(Contrasted with a credit, or positive, balance in the bank's records. Being a balance standing in favour of the customer.)

Risk management.
Caps.

A card enabling the holder to have purchases directly charged to funds on an account at a deposit-taking institution (this may sometimes be combined with another function, for example, that of a cash or cheque guarantee card).

Online settlement requires a personal identification number (PIN) to initiate the transaction.

Banking.
Also known as Debit transfer system.

Funds transfer.
A funds transfer system in which debit collection orders made or authorised by the payor move from the bank of the payee to the bank of the payor and result in a charge (debit) to the account of the payor; for example cheque-based systems are typical debit transfer systems.


Also known as Debit collection system.

1. That which is owed to another, usually money.

2. From the perspective of the borrower, finance from borrowing, rather than from investment by equity shareholders.

3. From the perspective of a lender or investor in debt, an investment in the obligations of the borrower.

A book-entry system for the issue and registration of debt securities.

The total amount which a company is capable of borrowing.

The capital that a business raises by taking out a loan.

One of a number of Gearing ratios.

The same as Debt for equity swap.

The purchasing, normally with recourse to the seller, of accounts receivable as a mechanism for providing short-term finance on a continuing basis.

The exchange of an investor's debt instruments for equity.
This is most commonly undertaken when the borrower is financially distressed.

(DMO). An executive agency of HM Treasury responsible for carrying out the UK Government's debt management policy of minimising financing costs over the long term, taking account of risk, and managing the aggregate cash needs of the Exchequer in the most cost-effective way, in both cases consistently with the objectives of monetary and any wider policy considerations.

Pensions.
This is the statutory debt due in the UK from the employer to a defined benefit pension scheme where, on winding-up of the scheme or the liquidation of the employer, the assets are insufficient to meet the actuarial liabilities.

The same as Debt service ratio.

1.Credit rating.
A ratio used to assess a country’s creditworthiness.
It is the ratio of a country’s total debt service payments to its exports.

2.
More generally, the ratio of any borrower's net cash inflows - before debt servicing payments - to its total debt servicing payments including principal/capital repayments as well as interest.

3.
A similar ratio calculated on a profit and loss account/income statement basis, rather than on a cash flow basis.

Also known as the Debt service cover ratio.

Near enough the same as the Debt equity ratio.

The same as Days Sales Outstanding.

Near enough the same as receivables management.

1. Amounts which a reporting entity is due to receive.

2. Those who owe the amounts which are due.

Statistics.
Division of a frequency distribution into 10 equal parts.

European Union law.
EU law which is binding only on the individual, business or member state to which it is addressed.

A diagram that illustrates the related stages of a sequential decision problem.

Law.
A statutory declaration made by the directors of a company, prior to its liquidation, to the effect that they have made a full enquiry into the affairs of the company and have formed the opinion that the company will be able to pay its debts in full within a period of not more than 12 months from the date on which the winding up/liquidation commences.

Banking.
The process of deducting bank fees directly from the payment account.
Common in some countries where a correspondent bank is used to effect a cross-border payment.

1. Amount of money subtracted from an account or from any amount payable/receivable, to pay for services, goods or taxes.

2. Tax.
Amounts for which tax relief is given. Most often by subtracting the deductions from (otherwise) taxable profits, before calculating the amount of tax payable on the net taxable profits.

Law.
A formal written document that fulfils certain legal requirements.
For example, a trust deed.

Law.
A deed varying the terms of, for example, a trust set up under a previous deed.

Also known as a supplemental deed.

An issue of securities at a large discount to their par value.

The situation in which it is possible to trade large amounts of securities without significantly affecting the price.

Failure to honour the terms of an agreement; for example a loan agreement.

Also known as Close-out netting.

UK Tax.
A penalty levied on a taxable person for late delivery of a Return and or late payment of VAT.

Law.
In a civil case, the person complained against; in a criminal case, the person accused of the crime.

The valuable operational choice available to the owner of a project or of a business, to defer 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 abandon the given project or business.

Pensions.
A deferred pensioner.

Accounting.
Income for which payment has been received by the business but which has not yet been earned.

Deferred income is recorded as a credit balance in the balance sheet. (The related accounting entries being DEBIT Cash and CREDIT Deferred income.)

For reporting presentation purposes it is often aggregated with Accruals as 'Accruals and deferred income'.

Pensions.
A deferred pensioner.

Pensions.
A person entitled to preserved benefits under a Defined benefit pension scheme; also referred to as a deferred member.

Accounting.
An accounting concept that arises to match the income and expenditure in a set of financial accounts with their related tax effects, by comparing for example the net book value of fixed assets and their respective Tax written down values.

Deferred tax relates to the estimated future tax consequences of transactions and events that have been entered into at the balance sheet date. Deferred tax relates to the difference between the 'accounting' and 'tax' balance sheets.

A simple example of a deferred tax asset is a tax loss eligible for carry forward to shelter expected future taxable profits. In this case the expected future tax saving would be an asset/benefit recognised in the current balance sheet.

Accounting.
Deferred tax.

1. Pensions accounting.
The excess of liabilities over assets in a funded Defined benefit pension scheme; also known as under-funding.

For example, if the liabilities were 100 and the assets were 90, the deficit would be 100 - 90 = 10.
(Not to be confused with the percentage funding level which in this example would be 90/100 = 90%.)

2. More generally, any financial shortfall.

(DB). A pension scheme that provides benefits based on how much a member is paid and the number of years they have been in the scheme; also known as pay related schemes (one example of which is a final salary scheme).
Such schemes may be funded or unfunded.

(DC). A pension scheme where benefits are based on how much money has been paid into the scheme and the investment returns earned, a significant part of the sum achieved often being invested in an annuity at market rates at or soon after retirement.
Such schemes are by definition funded.

Also known as money purchase schemes.

Law and pensions.
The final version of a trust deed covering all necessary clauses, traditionally only drafted after gaining Her Majesty's Revenue & Customs approval of an interim deed.

Economics.
A situation in which prices generally are falling. In other words, inflation is negative.

An agent that guarantees to his principal, for an additional commission, that third parties involved in the transaction will pay on the due date and, if they fail to do so, that the del credere agent himself will pay the debt due.

1.
Law made by ministers under delegated powers given to them by Parliamentary Acts.
Sometimes referred to as secondary legislation or subordinate legislation.

2.
A secondary source of UK tax law that is not written by parliament but usually by Her Majesty's Revenue & Customs.

3.
Law created by any other subordinate law-making body, within the authority of an Enabling Act - or other primary legislation - enacted by the primary law-making body.

A latin phrase meaning that a person who has been delegated to cannot sub-delegate.

A mechanism where some or all transfers to/from a defaulting participant are excluded from the settlement process.

In a netting scheme, this entails the recalculation of other participants’ bilateral and/or multilateral net positions.

Deleverage.

To deleverage is to decrease financial leverage.
For example by paying off existing debt, or by not renewing maturing debt.

Law.
The equivalent concept in other legal systems - including Scots law - to the concept of tort in the English legal system.

The final settlement of a securities transaction.

Also known as Delivery versus payment system.

The risk, on a payment date when each party has an obligation to make a payment, that one party will make its required payment but the other party will fail to do so.

(DVP). A mechanism in an exchange-for-value settlement system that ensures that the final transfer of one asset occurs only if the final transfer of (an)other asset(s) take(s) place.

Assets are, among others, monetary assets (this includes foreign exchange), all types of securities and other financial instruments.

Also known as Delivery against payment system.

1. Maths.
Delta is the slope of the curve of option value plotted against underlying asset price.

Mathematically, it is the first derivative of option value with respect to the underlying asset price.

It ranges between 0 and +/-1, depending on whether the option is a call or a put, and whether we have a long (bought) or short (sold) position in the option.

2. More generally, any change in a variable, especially a financial variable.

Delta hedging.

Hedging with options.
The hedging of an option position against changes in the market price of the underlying asset.

A delta hedge is established by buying or selling an amount of the underlying asset calculated by multiplying the number of related options by the delta of the options.

A delta neutral market position is one which is fully hedged against changes in the market price of the related asset.

(DelVaR). Risk management.
Also known as Marginal VaR.

In Value at Risk analysis, an approach to calculating the underlying probability distribution. To execute it usually requires one to estimate the means, variances and correlation coefficients from historical data.

If this is the case, the following assumptions are being made:
o Past data on portfolio value changes or returns are normally distributed; and
o The future will mirror the past, in the sense that the distributions of market rates or other environmental parameters (and the correlations between them, where relevant) will not change.

Also known as the Variance-Covariance method.

Risk management.
Delta Value at Risk.

1. Economics.
The quantity of a particular good or service that an individual wants - and is able to purchase - at any given market price.

2. Banking.
Refers to deposits or loans which can be withdrawn 'on demand' without giving notice.

Economics.
A graphical illustration of the periodic quantity of a specified good or service that the purchaser would be prepared to buy at a given price.

Banking.
A type of bank account from which the depositor can transfer funds without prior notice to a third party via a cheque, wire transfer, or an automated clearing house transfer.

Price elasticity of demand.

Also known as an overdraft.

Economics.
Policy aimed at stimulating spending and hence demand for goods and services in the economy.

For example an increase in government spending or a decrease in interest rates would increase demand for goods and services, causing the aggregate demand curve to move to the right.

Tends to be associated with Keynesianism.

Economics.
Inflation caused by an increase in aggregate demand, causing the aggregate demand curve to move to the right, increasing prices and output levels.

Documentation and regulation.
The elimination of physical certificates or documents of title which represent ownership of securities, so that securities exist only as accounting records.

1. Pensions.
Under the rules of a given pension scheme, someone who is financially dependent on a member of that scheme and who may receive certain benefits on the death of that member although not themselves a member of the scheme.

2. More generally, one who is financially dependent on another.

Depo market.

The short-term interbank market for deposits and loans. The depo market also lends to and accepts deposits from non-bank financial institutions such as building societies and treasury departments of other corporates.

(Not to be confused with Repo.)

1. A sum of money paid by a buyer as part of the sale price of something in order to reserve it.
The deposit may or may not be returned if the sale is not completed.

2. A sum of money lent to or placed with a financial organisation, such as a bank, for a set period or an indeterminate period for safekeeping or to earn interest or as a security to cover potential trading losses.

The sum of each cheque deposited into a bank account multiplied by its availability in days.

A scheme which guarantees bank depositors' funds (subject to specified limits) should the bank fail.

A person who places or has money on deposit in a bank or similar organisation.

An agent whose primary function is to record securities either physically or electronically and to keep records of the ownership of these securities.

(DTC). (US). A subsidiary of the Depository Trust and Clearing Corporation (DTCC), the DTC is an automated central securities depository.

It is a member of the US Federal Reserve System, a limited-purpose trust company under New York State banking law and a registered clearing agency with the Securities and Exchange Commission.

1. UK Tax.
An asset which has a life not exceeding 60 years.

2. Any asset whose value is normally expected to reduce with the passing of time.

1.
An accounting charge reflecting the estimated annual cost to a business of a capital asset over its estimated useful economic life. Accounting depreciation seeks to ensure that the total accounting cost of a capitalised asset is appropriately spread and matched to the economic benefits of using the asset.

Methods of spreading the total accounting cost include Straight line, Reducing balance and Sum of the digits.

2.
More generally, any decrease in the value of an asset resulting from the passing of time.

3.
A decrease in the value of a currency.

The removal or relaxation of the barriers or rules that have previously restricted the scope of securities trading and the nature of the operations undertaken by financial institutions.

1. Derivative instrument.

2. Maths.
A derivative function describes the rate of change of the underlying function, with respect to changes in one of the variables in the underlying function.

The first derivative describes the slope of the function curve at a given point on the curve.
The second derivative describes the rate of change of the slope. In other words the degree of curvature, at a given point.

A derivative instrument or contract is one whose value and other characteristics are derived from those of another asset or instrument (sometimes known as the Underlying Asset).

For example, a share option is a type of derivative contract, allowing the holder to buy shares at a certain predetermined strike price. The value of the share option derives from the current price of the related underlying share relative to the option strike price.

A generic term for the range of traded instruments that have grown up around securities and currency and commodity trading.

Also known as a Dutch auction.

Techniques and measures that help decision makers describe statistics.

(DNS). A net settlement system where final settlements occur at designated times.

VAT.
For UK VAT purposes, goods or services supplied to customers registered for VAT elsewhere in the EU.

Describing a model or other situation in which a given set of inputs will always produce the same result.

A substantial decline in an exchange rate, usually effected in one go by government decree.

Discount Factor.

The Internal Market and Services Directorate General, one of the Directorates General and specialised services which make up the European Commission.

DG MARKT's main role is to co-ordinate the Commission’s policy on the European Single Market and to seek the removal of obstacles to trade, in particular in the field of services and financial markets.

Dividend Growth Model.

A sitting or season of an exam.

An arrangement involving the exchange of payments denominated in different currencies and with a different floating exchange rate. However, actual payments are always denominated in the same base currency.

Digital signatures are the electronic equivalent of a manual signature which both verify the sender of the message and allow the recipient to check that the message has not been tampered with.

Using public key infrastructure a sender’s private key is used to create the digital signature and the receiver uses the sender’s public key to verify that the signature is authentic.

The adverse effects on the shareholder value, control and earnings per share of current shareholders of prospective future issues of ranking share capital.

A bond denominated in Chinese renminbi, but issued outside China.

Economics.
The theory that consumption of each additional unit of a product or service results in the marginal utility decreasing.

The Law of diminishing returns is a theory describing the contribution to total production which is expected to result from the addition of extra units of one factor of production.

According to the law of diminishing returns the contribution of the extra factors of production may rise at first, but after some point will always start to fall. So that ultimately the marginal returns from further extra factors of production will become smaller and smaller.

European Union Law.
Legal cases heard by the European Court of Justice where the community institutions are suing or are being sued by a member state.

The recovery of outstanding receivables by a third party in exchange for a fee, which is usually a percentage of the outstanding amount.

Costs which can be directly associated with the production of particular units or types of product.

An electronic transfer of funds directly into a bank account.

A pre-authorised debit on the payor’s bank account initiated by the payee.

The electronic transfer of funds directly into the beneficiary’s account.

Widely used for payments such as salaries, tax refunds for example.

European Union Law.
The principle that European Union law is law within the member states, enforceable by anybody, applied by the courts of the member states and taking precedence over national laws.

Purchase of a foreign financial asset in which substantial involvement in the management of foreign asset is presumed. In practice, it is any holding that represents more than 10 per cent ownership of the foreign asset.

In relation to a Cashflow statement, the Direct method shows all categories of receipts and payments explicitly.

Contrasted with the Indirect method, which starts with a reported profit/(loss) figure and then adjusts it to calculate the net cash movement.

The indirect method is more widely used in external financial reporting.

A participant in an interbank funds transfer system (IFTS) which is responsible to the settlement agent (or to all other direct participants) for the settlement of its own payments, those of its customers, and those of the indirect participants on whose behalf it is settling.

A foreign exchange rate quotation where the USD is the quoted currency.

Banking.
An alternative to other cheque clearing processes in which banks send cash letters directly to a non-local federal reserve or the paying bank.

A tax which is levied on a taxpayer who is intended to suffer the final burden of paying tax.

European Union law.
An act of European Union (EU) law having indirect effect in relevant member states.
The member states affected by the EU Directive are required to implement the directive domestically, but they are free to choose the form and method for doing so.

Financial accounting.
A required component of the Annual Report in the UK, the Directors’ report includes mandatory elements such as shareholders owning over 3% of shares, corporate governance and Directors’ remuneration.

Also known as a Managed float.

Bond pricing.
The dirty price of a bond includes accrued interest and is the total amount payable on the sale and purchase of the bond in between interest payment dates.

Also known as the 'invoice price' of the bond, because this is the amount that would be payable by a buyer to a seller, for the transfer of ownership of the bond.

1. Accounting.
The accounting principle that relevant assets and liabilities should normally be reported separately at their gross amounts, rather than being netted off.

2. The closely related (but wider) accounting principle that important relevant amounts should be disclosed separately, rather than only being reported as a total figure.

Tax.
Amounts paid out by a taxpayer which are not eligible for tax relief.

Such amounts charged to accounting profits would be added back to the accounting profits, in the calculation of taxable profits in the taxpayer's tax computation.

For this reason they are sometimes known as 'addbacks'.

(DRP). Planning to enable a financial or other administrative function to continue to carry out its responsibilities in the event of a breakdown in its physical facilities.

The payment of expenses or discharge of a monetary obligation.

The time interval or cash amount outstanding between the time a payor posts a cheque and the time the bank debits the payor’s account.

Financial accounting.
This is additional accounting information provided to aid the interpretation of the primary financial statements.

Pensions.
The cessation of contributions to a pension scheme leading either to winding up or to the scheme becoming paid up. Discontinuance valuations are made on such a basis.

Pensions.
An example of an accrued benefits funding method.

1. Noun. In relation to a discount instrument, the difference between the current market price and the redemption amount.

2. A coupon bond trading in the market at a discount has a market value less than its par value.

3. A foreign currency trading at a discount in the forward foreign exchange market is weaker in the forward market than in the spot market.

4. Verb. In relation to a money amount, make smaller. For example, to discount back a future cashflow to a (smaller) present value.

5. Verb. In relation to financial instruments, to exchange an instrument with a future maturity date, for a 'discounted' market value today. Today's market value being smaller than the redemption amount (receivable at maturity) by the amount of the discount.

This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).

For example when an instrument is quoted - on a discount basis, one period before its maturity - at a discount of 10% per period, this means that it is currently trading at a price of 100% LESS 10% = 90% of its terminal value.

(The periodic yield on this instrument is 10%/90% = 11.11%. So if the same instrument had been quoted on a yield basis, then the quoted yield per period = 11.11%.)

The relationship between the periodic discount rate (d) and the periodic yield (r) is:
r = d/[1-d]

So in this case:
r = 0.10/[1 - 0.10 = 0.90]
= 11.11%

1.
(DF). Strictly, the number less than one which we multiply a future cash flow by, to work out its present value as:
PV = DF x future cashflow.

The periodic discount factor is calculated from the periodic yield as:
DF = (1 + periodic yield)^-1

Commonly abbreviated as DF(n,r) or DF_n
where n = number of periods, and
r = periodic cost of capital.

For example when the periodic cost of capital (r) = 6% and the number of periods in the total time under review (n) = 2, then:
Discount factor = (1+r)^-n
= 1.06^-2
= 0.8890

2.
Loosely, the yield or cost of capital used for the purpose of calculating Discount Factors.
For example the 6% rate applied in definition 1. above.

A UK financial institution that acts as an intermediary between the Bank of England and other parts of the banking system.

Securities that are issued and traded at a discount to their face value.

Depending on the market, their prices may be quoted conventionally in the market either on a discount basis or on a yield basis.

Discount instruments quoted on a discount basis include bills of exchange and US domestic commercial paper (USCP).

Discount instruments quoted on a yield basis include sterling commercial paper (SCP) when issued at a discount.

(However, SCP may also be issued on an interest bearing basis.)

A short-term note (with a maximum maturity of 360 days) issued at a discount to its par value. It pays out no interest but investors receive par value upon maturity.

1. The quoted market return for traded instruments quoted at a discount. The market discount rate is quoted based on a percentage of the maturity amount. (This is different from a yield or interest rate, which is conventionally quoted based on a percentage of the starting amount.)
In the US this is also known as a 'discount yield'.

2. Cost of capital. The yield used to calculate discount factors and present values.

3. The rate used to discount future liabilities of a Defined benefit pension scheme in order to calculate the present value of the liabilities, often for the purpose of comparing them with the market value of the scheme’s assets.

Historically it was common to use the blended rate of investment return expected on the actual assets in the scheme, but typically now a market rate is used, such as the government bond or AA corporate bond yield for a fixed income security with a similar duration to that of the underlying liabilities.

4. In the US, the interest rate that member banks pay the Federal Reserve when the banks use securities as collateral. The discount rate acts as a benchmark for interest rates issued. Other central banks also have similar discount rates.

US.
The quoted market return for traded instruments quoted at a discount.

The market discount yield is quoted based on a percentage of the maturity amount. (This is different from a yield or interest rate, which is conventionally quoted based on a percentage of the starting amount.)

(DCF). A process of discounting cash flows that are expected in the future to make them comparable in value with cash flows received today.

This process is widely used in investment appraisal, where the rate used to discount with is a measure of the appropriately risk adjusted cost of capital.

Where the sum of discounted future positive cash flows (inflows) is calculated, this is often referred to as the total Present value of those cash flows.

Where the present value of future expected cash flows is netted against discounted investment outflows, this is referred to as the Net present value of the investment proposal.

Discounted cash flow techniques include Net Present Value (NPV) analysis and Internal Rate of Return (IRR) analysis.

A discredited model for valuing investments that determines a present value for the investments by discounting the expected future income from the assets.

It is now considered preferable to use the market value of assets in all cases where these are available.

A variant of the payback method of investment appraisal in which amounts of money arising in different time periods are discounted to their present values.

For example a proposal requires an initial investment of $100m at Time 0 years, and will then pay out annual amounts of $10m, $20m, $30m, $40m, $50m and $60m at Times 1 to 6 years hence respectively. The relevant cost of capital is 10% per year.

The cumulative discounted net cash flow and discounted payback period are calculated as follows:

Discounted cash flows:
Time 0: $(100)m x 1.10⁰ = $(100)m.
Time 1: $10m x 1.10^-1 = $9.09m.
Time 2: $20m x 1.10^-2 = $16.53m.
Time 3: $30m x 1.10^-3 = $22.54m.
Time 4: $40m x 1.10^-4 = $27.32m.
Time 5: $50m x 1.10^-5 = $31.05m.

Cumulative discounted cash flows:
Time 0: $(100)m.
Time 1: $(100)m + $9.09m = $(90.91)m.
Time 2: $(90.91)m + $16.53m = $(74.38)m.
Time 3: $(74.38)m + $22.54m = $(51.84)m.
Time 4: $(51.84)m + $27.32m = $(24.52)m.
Time 5: $(24.52)m + $31.05m = +$6.53m.

The initial investment has paid back by the end of 5 years, so the payback period to the nearest whole year is 5 years.
It is also possible to calculate a more refined estimate using interpolation between 4 years and 5 years, by assuming that the cash flows arise evenly over the course of the 5th year.

This method removes some of the problems of the simple payback method, but still leaves significant problems and simplifying assumptions.

UK Tax.
An assessment issued by the Her Majesty's Revenue & Customs if they discover that taxable profits have been omitted from tax returns made by the taxpaying company.

Statistics.
A random variable for which it is possible to make a finite list of all possible values.

Economics.
Where the real wage is above the equilibrium level and aggregate supply of labour exceeds aggregate demand for labour.

Law.
In commercial law, the failure to honour a negotiable instrument. This may be by non-acceptance, or by non-payment.

Disintermediation refers to the general process of cutting out of the financial intermediary by companies which are in a position to borrow and lend funds between themselves, or to directly access the capital market.

Disintermediation developed as consequence of the worsening credit quality of banks following the debt crisis in the 1980s, which resulted in many large companies commanding credit ratings that were as good as, or better than, the banks.

Tax.
Usually the sale proceeds.

Law.
To find that the significant facts of an apparently similar earlier case are not the same as those of a later case, so that no question of the earlier case being a binding precedent arises.

Distribution cost is the sum of costs associated with the warehousing of products and their delivery to customers.

A forecasting technique used in cash scheduling wherein the distribution of cash flow over a given period is estimated.

In the Capital asset pricing model, also known as Specific risk.

Risk management.
The process of spreading risk such that no single event can have a catastrophic effect.
Often referred to as 'Don't put all your eggs in the same basket'.

In corporate finance the term is often used to mean the process of ensuring that an investment portfolio is constructed such that all possible specific risk (diversifiable risk) is eliminated.

UK Tax.
A UK company which is used solely to hold overseas investments and to manage the flow of dividends with their associated foreign tax credits from overseas. The structure is used to avoid wasting double tax relief.

Profit attributable to ordinary shareholders ÷ Dividends.

Dividend cover measures the safety or sustainability of the future dividend flow, from the perspective of the investor.

The greater the cover ratio, the greater the assumed likelihood that the firm paying the dividend will continue to be able to pay it in the future.

In the situation where the cover ratio falls below 1.0, the dividend is said to be uncovered and it will not be sustainable at its previous level unless there is a recovery in the firm's profits.

Also known as the dividend cover ratio.

(DDM). Also known as Dividend growth model.

(DGM).
1.
The Dividend growth model links the value of a firm’s equity and its market cost of equity by modelling the expected future dividends receivable by the shareholders as a constantly growing perpetuity.

Its most common uses are:
(1) Estimating the market cost of equity from the current share price; and
(2) Estimating the fair value of equity from a given or assumed cost of equity.

Expressed as a formula:
Ke = D₁/P₀ + g
OR (rearranging the formula)
P₀ = D₁/[Ke-g]

Where:
P₀ = ex-dividend equity value today.
D₁ = expected dividend at Time 1 period hence.
Ke = cost of equity per period.
g = constant periodic rate of growth in dividend from Time 1 to infinity.

This is an application of the general formula for calculating the present value of a growing perpetuity.

2.
For example calculating the market value of equity:
D₁ = expected dividend at Time 1 period hence = $10m
Ke = cost of equity per period = 10%
g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%

P₀ = D₁/[Ke-g]
= $10m/[0.10 - 0.02 = 0.08]
= $125m.

3.
Or alternatively calculating the current market cost of equity using the rearranged formula:
Ke = D₁/P₀ + g

D₁ = expected dividend at Time 1 period hence = $10m
P₀ = current market value of equity per period = $125m
g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%

Ke = $10m/$125m + 2%
= 10%.

Also known as the Dividend discount model, the Dividend valuation model or the Gordon growth model.

Dividend irrelevancy theory.

In financial theory dividend payments and policies should be irrelevant when financial markets are efficient.

But in practice decisions about dividend levels are important because of their informational content. This informational content is known as signalling.

The proportion of the total earnings attributable to ordinary shareholders paid out by way of ordinary dividends.

Also known as the Payout ratio.

(DVM). Also known as Dividend growth model.

Dividend per share ÷ Current share price.

Dividend yield can also be calculated as Total dividends ÷ Total current market value of equity, giving an identical result.

Dividend yield measures the income return enjoyed by shareholders on the current market value of their investments.

(The other component of shareholders' total returns being the expected capital growth in the value of their shareholdings.)

1. Accounting.
Strictly defined, dividends are an appropriation of profit to the shareholders.

2. More loosely, dividends are normally - but not always - amounts paid out to shareholding investors in cash.

Debt Management Office.

Designated-time Net Settlement.

An international payment method that processes the collection of a draft and accompanying shipping documents through international correspondent banks.

Near enough the same as letter of credit.

1. In its widest sense documentation means written evidence, which may or may not have legal effect.

2. In the context of financial contracts - such as loan agreements - the documentation is the written form of the contract.

The risk that contracts or business relationships may have unforeseen adverse legal consequences as a result of the way in which they are documented. A common example is borrowings documentation.

International trade.
Documentary collection instructions requesting the presenting bank to deliver documents only upon acceptance of the draft from the importer.

International trade.
Documentary collection instructions requesting the presenting bank to deliver documents only upon receipt of payment from the importer.

US.
Abbreviation for the Dodd-Frank Act.
In full, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The main aims of Dodd-Frank are to:
1. Promote the financial stability of the United States by improving accountability and transparency in the financial system;
2. End "too big to fail";
3. Protect US taxpayers by ending bailouts; and
4. Protect consumers from abusive financial services practices.

1. A business with a small share of a market with slow (or negative) growth.

2. A poorly performing business or product.

Also known as Price value of a basis point.

A bond issued in domestic currency in the same jurisdiction as the issuer, and designed to be traded within the same domestic jurisdiction.

A mutual fund which only invests in securities originating from a single country, which is more often than not the country in which the fund is domiciled.

The country of a fund’s creation.

Portfolio analysis.
An efficient portfolio.

Portfolio analysis.
An investment portfolio is said to "dominate" other portfolios if it offers either:

(i) Higher expected return than other portfolios of equal risk, or
(ii) Lower risk than other portfolios for equal expected return.

UK Corporation tax.
In relation to companies, not carrying out any trading or other business activity, and not liable for Corporation Tax.

In contrast with an 'active' company.

1. Accounting.
An error where a transaction or item is counted more than once.

2. Economics.
The error of counting the value of a nation's or other entity's goods more than once in calculating total production levels or other activity levels.

This can happen when products are produced in stages, through specialised channels of production and intermediate goods are used to produce the final products. If the values of the intermediate stages are added together, without subtracting expenditure incurred during the production process, the error of double counting will occur.

3. Any similar error in other contexts.

1. Economics.
A double dip recession is a period of declining gross domestic product, followed by a brief recovery and then a further period of decline.

2. Tax.
Double dip referred to historical aggressive tax planning structures under which two tax deductions were claimed for essentially the same expenditure. For example in relation to certain cross border leasing arrangements.

1.
Accounting.
The dual aspect concept that every accounting transaction has two sides.
(Therefore the balance sheet should always remain in balance.)

For example, if services are sold by a company for cash, the company's Sales figure increases AND its Cash increases.

Taking another example, if a company borrows money, its Cash increases AND its Liabilities (to repay the money in the future) also increase.

2.
An error resulting from the inappropriate duplication or inappropriate repetition of an entry or part of an entry, in a financial information system or elsewhere.

Tax.
Agreements between countries to attribute taxing rights and provide relief where double taxation might otherwise apply.

Tax.
Taxes paid twice, once abroad where income is earned and a second time in the United Kingdom, if the overseas company is UK owned.

A principle of tax law is that double taxation should normally be avoided.

Tax.
Relief for tax which has been levied by two different countries on a taxable source of income.

Tax.
A set of bilateral agreements between two countries that set out the taxation rights of each country.

They are designed to facilitate international trade by avoiding double taxation where each country will seek to tax the same income or company.

Dow Jones Industrial Average. A stock market index that shows how 30 large, publicly-owned companies based in the US have traded during a standard trading session in the stock market.

1. Credit rating.
A worsening in a credit rating assessment.

2. More generally, a worsening in any assessment including (but not necessarily) a credit assessment.

The likelihood that a security or other investment will decline in price, or the amount of loss that could result from that potential decline.

1. In relation to guarantees, a downstream guarantee is one given by a parent company in relation to the obligations of one of its subsidiary companies.

2. A downstream loan is a loan made by a parent company to one of its subsidiary companies.

3. In the oil and gas industry the downstream business refers to distributing and selling refined and synthetic oil and gas products, together with the refining of crude oil.

Book-keeping.
Debit.

Book-keeping.
Debit.
Also written DR.

Documentation.
A written order from one party (the drawer) to another (the drawee) to pay a party identified on the order (payee) or the bearer a specified sum, either on demand (sight draft) or on a specified date (time draft).

When a part of a borrowing facility is used.

Drawee bank.

The bank on which a cheque is drawn, the payor’s bank.

The person or company issuing a cheque.

Accounting.
Money taken by a sole trader or partner from their business bank account.

Days Receivables Outstanding. The same as Days sales outstanding.

Bond pricing.
A bond or similar instrument which initially bears interest at a variable rate as if it were a floating rate obligation, but which will change to bear interest at a predetermined fixed rate in the event that a defined market rate falls to a stated level.

Disaster Recovery Planning.

Days Sales Outstanding.

Depository Trust Company.

A security denominated in one currency with interest or principal or both paid in another at a pre-agreed rate.

Tax.
A company which as a consequence of alternative residence criteria such as incorporation or control, is deemed to be resident for tax purposes in two different jurisdictions.

Such companies may be able to borrow or carry out other transactions on a tax efficient basis.

Also known as link companies.

The organisational principle that any process capable of generating a significant impact or loss should be subject to independent review.

The process of detailed investigation and verification of key information by a prospective investor.

Pensions.
A pensions funding method is considered durable if the contribution rate remains stable if a major event occurs. (For example the closure of a scheme to new entrants.)

Durability is considered a desirable characteristic.

1.
In finance, duration - strictly defined - is the weighted average timing of all of an instrument’s cashflows, where the weightings are the present values of the cashflows at the current market yield.
By formula, Duration = Sum(PVt)/Sum(PV).

Duration is widely used as a risk measure of a portfolio of assets or liabilities. It gives a general indication of the sensitivity of an instrument's or a portfolio's market price to small changes in market yield. (Modified duration measures this in a more refined way.)

Broadly speaking, the longer the duration, the more sensitive the market price is likely to be to (small) changes in interest rates. Duration is also used as a measure to compare debt securities that have different maturities and yields.

More strictly, the duration of an instrument specifies the remaining life of a zero coupon bond with the same value sensitivity (to a very small change in yield). Both can be regarded as equivalent to a single future cash flow after this period of time. If there is uncertainty about the timing or the occurrence of future cashflows - for example a call option on a bond - then the concept and calculation of duration becomes more complex.

Not to be confused with maturity, which is different.

2.
More loosely, the terms duration and Modified duration are often used interchangeably.

Obviously this can lead to potential confusion, so it is important to clarify whether duration or modified duration is intended in any particular context.

Dutch auctions use a bidding process that starts with a high price and continues to lower the price until all the available shares or units have been sold.

Usually done on a sealed bid basis and all buyers pay the same price.

Also known as a descending price auction.

Dollar Value of a Basis Point.

Dollar Value of a Basis Point.

Dividend Valuation Model.

Delivery Versus Payment system.

Options trading and hedging.
Dynamic hedging recognises that the hedge ratio depends - among other things - on the current market price of the underlying asset.

So that as the underlying market price changes, the amount of the hedging instrument held needs to be adjusted dynamically, in line with the changing hedge ratio.