Glossary of Terms

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.

Ways of illustrating statistical results.

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.

(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.

Pensions. Abbreviation for Defined benefit pension scheme.

Pensions. Abbreviation for Defined contribution pension scheme.

Abbreviation for Discounted Cash Flow.

Abbreviation for Dividend Discount Model.

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

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. Debits represent assets or expenses. While Credits represent liabilities or income.

Financial accounting. This is an asset within the balance sheet, or an expense within the profit and loss account or income statement.

Risk management. See 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. Same as Debit transfer system.

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.

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.

One of a number of Gearing ratios.

(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 the Debt equity ratio, being one of a number of Gearing ratios.

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.

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.

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 the market price or par value.

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

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.

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'.

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

An accounting concept that arises to match the income and expenditure in a set of financial accounts, 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.

Accounting. See Deferred tax.

1. 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; also known as money purchase schemes. Such schemes are by definition funded.

Law and Pensions. The final version of a trust deed covering all necessary clauses, traditionally only drafted after gaining HMRC approval of an interim deed.

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. Sometimes referred to as secondary legislation or subordinate legislation, it is law made by ministers under delegated powers given to them by Parliamentary Acts.

2. A secondary source of UK tax law that is not written by parliament but usually by HMRC.

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

Law. The equivalent concept in other legal systems - including Scots law - to the concept of Tort in, for example, the English legal system.

1. 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.

See Delta hedging.

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. See 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 quantity of a specified good or service that the purchaser would be prepared to buy at a given price per unit of time.

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.

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.

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

1. 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.

See 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.

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.

UK tax. An asset which has a life not exceeding 50 years.

An accounting term used to reflect the annual cost to the business of an asset over its useful economic life. Depreciation ensures that the accounting cost of a capitalised asset is matched to the benefits of using the asset.

See Derivative instrument.

A derivative instrument or contract is one whose value and other characteristics are derived from those of another asset or instrument.

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.

Techniques and measures that help decision makers describe statistics.

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

An abbreviation for Discount Factor.

An abbreviation for Dividend Growth Model.

A sitting or season of an exam.

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

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

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

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

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

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

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 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.

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.

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. 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.

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

The number less than one which we would 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.

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.)

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 quoted based on a percentage of the starting amount.)

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.

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 cost of capital.
Where the sum of discounted future positive flows is calculated, this is referred to as the 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.

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 present values. This removes some of the problems of the payback method, but leaves significant problems.

UK tax. An assessment issued by the HMRC if they discover that taxable profits have been omitted from tax Returns made by the taxpaying company.

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.

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, same as Specific risk.

The process of spreading risk such that no single event can have a catastrophic effect. Often referred to as not putting all of one’s eggs in the same basket. In corporate finance the term is often used to mean the process of ensuring that a 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.
Also known as the dividend cover ratio. 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.

Same as Dividend Growth Model.

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/Po + g
OR (rearranging the formula)
Po = D1/[Ke-g]

Where:
Po = 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.

Also known as the Dividend Discount Model or the Gordon Growth Model.

See 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.

(DVM). Same as Dividend Growth Model.

Dividend per share ÷ Current share price.

Accounting. These are an appropriation of profit to the shareholders.

Abbreviation for Debt Management Office.

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

Synonym for 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.

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.

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

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.

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).

See Drawee bank.

See 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.

Abbreviation for Disaster recovery planning.

An abbreviation for Days’ Sales Outstanding.

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.

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.

In finance, duration 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 gives a general indication of the sensitivity of an instrument's market price, in relation to changes in market yields. (Modified duration measures this in a more refined way.)

Not to be confused with maturity, which is different.

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.

Abbreviation for Dollar Value of a Basis Point.

Abbreviation for Dollar Value of a Basis Point.

Abbreviation for Dividend Valuation Model. The same as Dividend Growth Model.

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.