Glossary of Terms
E
An abbreviation for Effective Annual Rate.
Pensions. A person who ceases to be an active member of a pension scheme, other than on death, without being granted an immediate retirement benefit, thus becoming a deferred pensioner.
1. The setting aside, at least notionally, of part of a pension fund for the benefit of a particular member, such as might be the case in a money purchase arrangement.
2. A court order directing the trustees of a pension scheme to make payments direct to a former spouse of a member; these generally form part of divorce settlements.
3. More generally, the notional setting aside of a part of any fund of assets for a specific purpose.
2. A court order directing the trustees of a pension scheme to make payments direct to a former spouse of a member; these generally form part of divorce settlements.
3. More generally, the notional setting aside of a part of any fund of assets for a specific purpose.
1. In relation to a UK firm, its profits available for distribution to ordinary shareholders. Also known as Net Profit.
2. In relation to firms more generally, their profits.
3. In relation to individuals, their earned income, for example salary. Distinguished from their investment income and their capital gains. This distinction is important in relation to individual taxation and in relation to pensions.
2. In relation to firms more generally, their profits.
3. In relation to individuals, their earned income, for example salary. Distinguished from their investment income and their capital gains. This distinction is important in relation to individual taxation and in relation to pensions.
Pensions. A limit (in the UK) on the amount of pensionable remuneration on which the benefits and contributions of a member could be based. This applied to periods up to April 2006, following which a new ‘simplified’ system of restriction applies.
(ECR). The rate applied by a bank to a company’s average available balances to offset bank fees.
A method of business valuation which is based on accounting earnings and the ratio of value to earnings of a comparable business (or a comparable group of businesses).
(EPS or eps). Profit attributable to ordinary shareholders ÷ Weighted average number of shares in issue during the year.
The earnings per share divided by the market price, expressed as a percentage. The reciprocal of the earnings yield is the price/earnings ratio.
Earnings Before Interest and Tax.
Near enough the same as PBIT.
Near enough the same as PBIT.
A method of business valuation which is based on accounting EBIT and the ratio of value to EBIT of a comparable business (or a comparable group of businesses).
Earnings Before Interest, Tax, Depreciation and Amortisation.
A method of business valuation which is based on accounting EBITDA and the ratio of value to EBITDA of a comparable business (or a comparable group of businesses).
Abbreviation for European Central Bank.
Abbreviation for Exports Credit Guarantee Department.
In foreign exchange risk analysis, the risk of adverse effects on the firm’s future operating cash flows arising from changes in foreign exchange rates.
For example, key competitors with currency cost bases in weaker or depreciating currencies. The term is also used frequently to apply to the longer term version of transaction exposure – for transactions expected to be agreed in the future.
The extent to which the value of a firm is at risk of adverse change as a direct or indirect consequence of future movements in foreign exchange rates.
A formula for determining the optimal size of orders and frequency for ordering stocks or raw materials based on the annual demand, the fixed ordering cost and the periodic holding cost of the item of stock in question.
See supernormal profit.
The risk associated with changes in exchange rates, local regulations or business environment, which could disadvantage the company’s long-term economic model or favour the services or products of a competitor. This type of exposure is very difficult to mitigate.
Also known as economic exposure.
Also known as economic exposure.
(EVA). The periodic addition to shareholder value resulting from the efficient management and allocation of a firm's resources.
EVA can be quantified as: EVA = [Return on book capital LESS Market cost of capital] x Book capital.
Taking a simplified example, for an all-equity financed firm with a market capitalisation (P0) of $130m, book value of equity $100m, and annual after tax returns of $13m.
[To keep the illustration simple, we will assume no growth, in other words the whole of the annual after tax returns of $13m are paid out as dividends (D1).]
Return on book capital = 13/100 = 13%.
Market cost of capital = 13/130 = 10%
(Using Ke = D1/P0).
EVA = [13% - 10% = 3%] x $100m = $3m.
In practice a number of adjustments would be made both to the market values and to the book values used in the calculation of the EVA. So the application of EVA analysis is both more complicated, and arguably more subjective, than the simple calculation illustrated above.
Turning back for now to our simple example, EVA is also closely related to Market Value Added (MVA). MVA is the total present value of the expected EVA in the current and future periods.
For example in this case it is a simple fixed perpetuity of $3m, which is evaluated using the simple fixed perpetuity formula 1/r at the market cost of capital 10%:
MVA = $3m/0.10 = $30m.
EVA can be quantified as: EVA = [Return on book capital LESS Market cost of capital] x Book capital.
Taking a simplified example, for an all-equity financed firm with a market capitalisation (P0) of $130m, book value of equity $100m, and annual after tax returns of $13m.
[To keep the illustration simple, we will assume no growth, in other words the whole of the annual after tax returns of $13m are paid out as dividends (D1).]
Return on book capital = 13/100 = 13%.
Market cost of capital = 13/130 = 10%
(Using Ke = D1/P0).
EVA = [13% - 10% = 3%] x $100m = $3m.
In practice a number of adjustments would be made both to the market values and to the book values used in the calculation of the EVA. So the application of EVA analysis is both more complicated, and arguably more subjective, than the simple calculation illustrated above.
Turning back for now to our simple example, EVA is also closely related to Market Value Added (MVA). MVA is the total present value of the expected EVA in the current and future periods.
For example in this case it is a simple fixed perpetuity of $3m, which is evaluated using the simple fixed perpetuity formula 1/r at the market cost of capital 10%:
MVA = $3m/0.10 = $30m.
A decrease in production costs per unit as a result of increasing production output.
Abbreviation for Euro Commercial Paper.
Abbreviation for Earnings Credit Rate. The rate applied by a bank to a company’s average available balances to offset bank fees.
The former European Currency Unit.
Abbreviation for Electronic Data Interchange.
See UN/Edifact Standards.
1. A quoting convention under which interest at the quoted rate is calculated and added to the principal annually. EAR is the usual quotation basis for instruments with maturities of greater than one year.
2. A conventional measure which expresses the returns on different instruments on a comparable basis. The EAR basis of comparison is the equivalent rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review.
For example GBP overnight interest is conventionally quoted on a simple interest basis for a 365 day year.
So GBP overnight interest quoted at 5.11% means:
(i) Interest of 5.11%/365 = 0.014% is paid per day.
(ii) The equivalent effective annual rate is = 1.00014365 - 1 = 5.24%.
2. A conventional measure which expresses the returns on different instruments on a comparable basis. The EAR basis of comparison is the equivalent rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review.
For example GBP overnight interest is conventionally quoted on a simple interest basis for a 365 day year.
So GBP overnight interest quoted at 5.11% means:
(i) Interest of 5.11%/365 = 0.014% is paid per day.
(ii) The equivalent effective annual rate is = 1.00014365 - 1 = 5.24%.
The same as Effective Annual Rate.
An accounting measure, calculated by dividing the net tax charge reported in the income statement by the related profit before tax. The effective tax rate will usually differ from the standard corporate rate of tax.
The quantified explanation of the differences between the effective tax rate and the standard corporate rate of tax is known as a tax reconciliation statement. (Abbreviated by accountants to 'tax rec'.)
The quantified explanation of the differences between the effective tax rate and the standard corporate rate of tax is known as a tax reconciliation statement. (Abbreviated by accountants to 'tax rec'.)
A financial ratio designed to measure the efficiency of management in controlling the working capital of the business. Also known as an activity ratio.
For example, the inventory turnover ratio.
For example, the inventory turnover ratio.
Portfolio analysis. The efficient frontier represents portfolios which dominate all other possible portfolios by giving the maximum possible expected return, for the given variance of returns.
Therefore rational investors will always invest only in portfolios which lie on the efficient frontier.
A market in which there is a sufficiently large number of buyers and sellers to eliminate arbitrage opportunities, and in which the trade off between risk and return is fully reflected in market prices.
(EMH). The hypothesis that markets operate efficiently; that assets are fairly priced to incorporate available information. There are three forms of potential efficiency: the weak form, the semi-strong form and the strong form.
The weak form states that past prices are no guide to future prices, so charting techniques cannot be used to make excess returns.
The semi-strong form states that prices react to public information so that any form of analysis using publicly available information cannot be successful in consistently generating excess returns.
The strong form states that even insider information cannot generate consistent excess returns.
Important implications of the efficient market hypothesis for financial managers include:
o Keeping the financial markets well-informed.
o Taking market price movements seriously.
o Not attempting to 'fine tune' the timing of security issues.
Also known as the Efficient markets hypothesis.
The weak form states that past prices are no guide to future prices, so charting techniques cannot be used to make excess returns.
The semi-strong form states that prices react to public information so that any form of analysis using publicly available information cannot be successful in consistently generating excess returns.
The strong form states that even insider information cannot generate consistent excess returns.
Important implications of the efficient market hypothesis for financial managers include:
o Keeping the financial markets well-informed.
o Taking market price movements seriously.
o Not attempting to 'fine tune' the timing of security issues.
Also known as the Efficient markets hypothesis.
Same as the Efficient market hypothesis.
Portfolio analysis. An efficient portfolio is one which lies on the efficient frontier. In other words an efficient portfolio has either higher expected return than all others of equal risk, or lower risk for equal expected return.
An abbreviation for Electronic Funds Transfer.
Electronic Funds Transfer at Point of Sale.
Extraordinary General Meeting.
Latin term meaning 'of the same kind'. In law, it is taken to mean that where general words follow specific words, those general words are interpreted in the light of the preceding specific words.
Economics. Where the percentage change in quantity (either demanded or supplied) is greater than the percentage change in price.
The degree of responsiveness in one variable to changes in another variable, typically a percentage change in quantity compared to a percentage change in price. Commonly used to describe price elasticity of demand and elasticity of supply.
The exchange of business information from one organisation to another in an electronic format in some mutually agreed standard. EC includes unstructured electronic messaging such as facsimile (fax) or electronic mail (Email) as well as Electronic Data Interchange (EDI) formats.
(EDI). The electronic exchange of business data between or within commercial entities (including their agents or intermediaries in some cases also public administrations), in a standard format, of data relating to a number of message categories, such as orders, invoices, customs documents, remittance advices and payments. EDI messages are structured computer-processable data formats that permit data to be transferred without rekeying and are then sent through public data transmission networks or banking systems channels. Any movement of funds initiated by EDI is reflected in payment instructions flowing through the banking system. EDIFACT, a United Nations body, has established standards for electronic data interchange.
(EFT). The movement of funds by non-paper means (ie, electronically), usually through a payment system such as the ACH network or Fedwire.
(EFTOPS) An electronic system whereby funds are moved automatically from a buyer's account to a seller's account, at the time of the purchase transaction.
A funds collection service that records the receipt of incoming wire transfer and ACH payments, reformats the data, and transmits it to the company in whatever format it desires.
A reloadable multi-purpose prepaid card which may be used for small retail or other payments instead of coins.
Also known as an Electronic wallet.
Also known as an Electronic wallet.
Same as electronic purse.
A bill of exchange which has been accepted by a bank and which is eligible for rediscount at the Bank of England.
The rate of discount of an eligible bill.
Abbreviation for Efficient Market Hypothesis.
Pensions. Same as Member Nominated Trustee.
(ERISA). US pensions. The Employee Retirement Income Security Act of 1974 is a US federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.
Pensions. The person or corporate entity with whom the member of a pension scheme has a contract of employment relevant to that scheme.
The former European Monetary System in the European Union.
European Economic and Monetary Union.
A provision that confers on appropriate officials the power to create law.
A process which electronically scrambles a message so that only persons who have compatible decryption hardware and/or software can interpret the message.
Funds transfer systems in which payment orders are received one by one by the settlement agent during the business day, but in which the final settlement takes place at the end of the day on a one by one or aggregate gross basis. This definition also applies to gross settlement systems in which payments are settled in real time but remain revocable until the end of the day.
A signature on the back of a negotiable instrument by which the signer transfers ownership of the instrument to another party.
1. A contract between an audit client and their auditing firm which defines the respective responsibilities of the auditors and the client's management and records matters such as the agreed level of fees.
2. Any similar contract between a client and a provider of professional services.
2. Any similar contract between a client and a provider of professional services.
Expenditure on an asset after its original acquisition.
The same as Entity.
(ERM). The process of analysing and managing risk at the level of the business enterprise as a whole.
1. In a commercial context, the business entity refers to the whole of the business undertaking, regardless of whether it is financed by equity alone or by a combination of equity and debt.
The Entity Value is therefore the total value of the Equity plus the Debt.
In this context the entity is also sometimes known as the Enterprise (and the entity value as the Enterprise Value).
2. Financial reporting. The reporting unit for which financial information is summarised and presented. For example a company or a group of companies.
3. Tax. A business unit which is subject to taxation. For example a company or a branch of a company established in another country.
The Entity Value is therefore the total value of the Equity plus the Debt.
In this context the entity is also sometimes known as the Enterprise (and the entity value as the Enterprise Value).
2. Financial reporting. The reporting unit for which financial information is summarised and presented. For example a company or a group of companies.
3. Tax. A business unit which is subject to taxation. For example a company or a branch of a company established in another country.
Pensions funding. An example of a Prospective benefits funding method.
Abbreviation for Earnings per share.
In relation to options, the same as Vega.
A state from which there is no pre-existing tendency to move.
Economics. Where there is an excess of people looking for work over those who are prepared to take the work.
1. A legal system that resolves disputes between persons by resort to principles of fairness and justness.
2. The capital of a firm invested by those accepting the greatest degree of risk, for example the holders of ordinary shares (also known as common stock) in a company.
3. Securities representing the rights of the risk capital investors in 2. above.
4. The net value of an asset, after deducting debt relating to it or secured on it.
2. The capital of a firm invested by those accepting the greatest degree of risk, for example the holders of ordinary shares (also known as common stock) in a company.
3. Securities representing the rights of the risk capital investors in 2. above.
4. The net value of an asset, after deducting debt relating to it or secured on it.
Financial accounting. The process of consolidation for associates.
In the CAPM, the relevant measure of total equity risk.
Share capital which has unlimited rights to participate in the distribution of either dividends or capital.
A method of accounting for an associated undertaking in a group of companies. The purpose is to include in the consolidated group accounts the cost of the investment plus the appropriate proportionate share of post acquisition profits.
The variability of returns to equity investors, often measured by the standard deviation of equity returns. In the Capital Asset Pricing Model, total equity risk is driven both by the underlying business risk and by the additional financial risk resulting from the level of debt in the firm’s financial structure.
The excess return expected from investing in equities, compared with the return on risk-free assets. This term is often used to mean the same as the Market risk premium.
US pensions. Abbreviation for Employee Retirement Income Security Act.
Enterprise Risk Management.
The European Exchange Rate Mechanism.
A legal doctrine by which a person is prevented from asserting rights or facts which are inconsistent with a previous position or representation he had made by his act, conduct or silence.
The Euro Interbank Offered Rate. The rate at which prime banks will borrow funds from other prime banks in the EU interbank market.
1. The common currency of the majority of the member states of the European Union. Its currency code is EUR.
2. A prefix usually meaning that currency is held in a different jurisdiction from its country of origin.
2. A prefix usually meaning that currency is held in a different jurisdiction from its country of origin.
A bond, normally issued in a Eurocurrency, in the international capital markets as opposed to in a national capital market. So eurobonds are - generally speaking - beyond domestic regulation.
Commercial paper issued in the euromarkets.
A currency held as a deposit outside its domestic territory (the country which issued the currency) but not necessarily in Europe.
Refers to a market that deals in a currency outside of its country of origin. For example eurodollar deposits are USD deposits held in London, or any market outside the U.S. but not necessarily in Europe.
A deposit in a bank account located outside the banking regulations of the country which issues the currency.
1. A general term for the international capital markets.
2. More specifically, the markets where a currency is traded outside that currency's home country.
2. More specifically, the markets where a currency is traded outside that currency's home country.
Generally used to describe a short-term promissory note, denominated in a eurocurrency, issued through an underwritten facility as opposed to by means of an uncommitted programme.
See European-style option.
(ECB). The central banking authority for countries in the Eurozone.
(ECU). A currency basket composed of specified proportions of the currencies of European Monetary System members, before it was replaced by the Euro.
(EMU). The system in the European Union for facilitating economic and monetary co-ordination among member states, leading to the adoption of a single European currency (the Euro).
(EMS). The predecessor in the European Union of Economic and Monetary Union (EMU), which led in turn to the establishment of the Euro. The EMS was designed to create an area of currency stability throughout the European Community by encouraging its member states to co-ordinate their monetary policies. The EMS used the Exchange Rate Mechanism (ERM) with the aim of stabilising exchange rates and thereby facilitating trade between member states.
Abbreviation for European Economic and Monetary Union.
An option which can be exercised only on its final maturity date.
Abbreviation for Economic Value Added.
Financial accounting. An Event after the Balance sheet date is an event which occurs between a company’s Balance Sheet date and the date on which the company’s financial statements are authorised for issue.
The event of breaching a loan agreement. Each loan agreement will normally define exactly what constitutes an event of default. Events of default will generally include any failure to comply with a covenant and any inability to repeat a representation.
Refers to the risk of the credit of a borrower deteriorating, due to a change in circumstances.
A facility whereby the final maturity may be extended periodically, with the lender's agreement, for a further term (normally a year at a time).
Abbreviation for Ex dividend.
1. In relation to a transfer of equity shares, a transfer excluding the entitlement to receive the next dividend payment.
2. A basis of quoting traded equity prices which excludes the entitlement to receive the next dividend payment.
2. A basis of quoting traded equity prices which excludes the entitlement to receive the next dividend payment.
Abbreviation for Ex interest.
1. In relation to the transfer of a traded debt instrument, a transfer excluding the entitlement to receive the next interest payment.
2. A basis of quoting traded debt prices which excludes the entitlement to receive the next interest payment.
2. A basis of quoting traded debt prices which excludes the entitlement to receive the next interest payment.
Forecast.
Historical.
The price of one currency in terms of another, for example £1 = $1.85, so £1 is the equivalent of $1.85 or $1 is the equivalent of £0.54.
(ERM).
1. A system under the former European Monetary System for stabilising exchange rates between participating member states.
2. A similar transitional system for European member states currently working towards adoption of the Euro to replace their domestic currency.
1. A system under the former European Monetary System for stabilising exchange rates between participating member states.
2. A similar transitional system for European member states currently working towards adoption of the Euro to replace their domestic currency.
Exchange trading is the alternative to Over the counter dealing. Exchange traded financial instruments are standardised, and less flexible, but the interposition of the exchange substantially reduces credit risk.
A system dealing with two-way exchanges of assets, often including money.
Contrasted with funds transfer systems, which generally deal with one-way transfers of money only.
Contrasted with funds transfer systems, which generally deal with one-way transfers of money only.
Contract law. Same as Exemption clause.
VAT. No VAT.
Pensions. The status accorded to UK occupational pension schemes by HMRC according them favourable treatment with respect to the tax deductibility of contributions and the tax free accumulation of income.
UK Tax. A capital gain which is wholly or partly exempt from capital gains tax. Examples include an individual's principal private residence, and gilts.
A term in a contract purporting to exclude or restrict the liability of one of the parties in specified circumstances.
In relation to options, same as Strike price.
Options. The same as the strike rate.
A description meaning that there are non-standard features in a financial contract.
Expectations theory states that the best measure of the market's average expectation of the outturn spot foreign exchange rate at a given future date is the current market forward rate for the same maturity.
Expectations theory also applies in the interest rate market and indeed any market where forward prices are quoted.
So for example in the interest rate market, expectations theory suggests that the current market forward interest rate is the best measure of the average market expectation of the outturn spot interest rate at the given future date.
Expectations theory also applies in the interest rate market and indeed any market where forward prices are quoted.
So for example in the interest rate market, expectations theory suggests that the current market forward interest rate is the best measure of the average market expectation of the outturn spot interest rate at the given future date.
The arithmetic mean value of a population.
Pensions. Liability projections require assumptions for a number of variables, including mortality, early leavers, inflation and other factors. Actual experience of these variables will cause the liabilities at any point in the future to differ from the projections, which will in turn influence contribution rates and the like. For example, increasing longevity will lead to increased liabilities (and hence to increased contribution rates).
Pensions. An example of actuarial gains and losses.
1. The exponential constant is a mathematical constant with a value of roughly 2.718, usually designated by the letter e.
2. The related exponential function is ex (e to the power of x). The exponential function in Excel is =EXP( ). The exponential function is the inverse of the natural logarithm.
3. Exponential growth means growth other than straight-line. For example the series 100, 200, 400... is growing exponentially.
4. Exponential decay means the reduction in a variable, for example over time, on a basis other than straight-line. For example the reduction in the time value of an option, as its remaining time to maturity expires.
2. The related exponential function is ex (e to the power of x). The exponential function in Excel is =EXP( ). The exponential function is the inverse of the natural logarithm.
3. Exponential growth means growth other than straight-line. For example the series 100, 200, 400... is growing exponentially.
4. Exponential decay means the reduction in a variable, for example over time, on a basis other than straight-line. For example the reduction in the time value of an option, as its remaining time to maturity expires.
See Exponential.
ex the inverse of the natural logarithm of x.
A method for analyzing the trend in a time series.
1. Goods and services produced domestically, which are sold abroad.
2. VAT. The movement of goods out of the EU.
2. VAT. The movement of goods out of the EU.
(ECGD) A UK government department dedicated to facilitating UK exports primarily through subsidised export financing, and political risk insurance.
An asset, a liability, or a net position which might give rise to a loss if there were to be an adverse change in general market prices or rates, or in the credit strength of a counterparty.
For example, a borrowing at the floating market rate of interest exposes the borrower to the risk of a rise in market rates. Because if the market reference rate went up before an interest resetting date, the borrower would have to pay a higher rate of interest on their borrowing.
For example, a borrowing at the floating market rate of interest exposes the borrower to the risk of a rise in market rates. Because if the market reference rate went up before an interest resetting date, the borrower would have to pay a higher rate of interest on their borrowing.
A period of time during which - if market prices or rates were to change adversely - a loss might be suffered.
For example, a floating rate borrower is exposed to the risk of a rise in the market interest rate. The exposure period starts today and ends on the date on which the interest rate is set.
For example, a floating rate borrower is exposed to the risk of a rise in the market interest rate. The exposure period starts today and ends on the date on which the interest rate is set.
A provision of a contract agreed to by the parties in words, written or spoken.
(XML). A standard data format used for text files and information in computer memory that allows easy data processing and exchange between different applications.
A wide area network (WAN) in which two or more organisations share information using internet protocols with access limited to the participants.
(EGM) Any general meeting of company members other than the annual general meeting.
1. A straight-line estimation method where the estimated result lies beyond the range spanned by two or more known data points.
2. More generally, any estimation method where the estimated result lies beyond the range spanned by two or more known data points.
2. More generally, any estimation method where the estimated result lies beyond the range spanned by two or more known data points.