Glossary of Terms

1. UK Tax.
Initial Allowance.

2. Insolvency Act.

International Accounting Standard(s).

The following International Accounting Standards have been withdrawn or superseded:
IAS 3, IAS 4, IAS 5, IAS 6, IAS 9, IAS 13, IAS 14, IAS 15, IAS 22, IAS 25, IAS 30, IAS 35.

International Accounting Standard 1, dealing with presentation of financial statements.
Issued by the International Accounting Standards Board.

International Accounting Standard 2, dealing with inventories.
Issued by the International Accounting Standards Board.

International Accounting Standard 7, dealing with statement of cash flows.
Issued by the International Accounting Standards Board.

International Accounting Standard 8, dealing with accounting policies, changes in accounting estimates and errors.
Issued by the International Accounting Standards Board.

International Accounting Standard 10, dealing with events after the financial reporting period.
Issued by the International Accounting Standards Board.

International Accounting Standard 11, dealing with accounting for construction contracts.
Issued by the International Accounting Standards Board.

International Accounting Standard 12, dealing with income taxes.
Issued by the International Accounting Standards Board.

International Accounting Standard 16, dealing with property, plant and equipment.
Issued by the International Accounting Standards Board.

1.
International Accounting Standard 17, dealing with leases.

IAS 17 requires finance lease liabilities to be accounted for 'on balance sheet'.
It also requires the appropriate allocation of the total lease instalments between finance charges and reduction of the outstanding lease liability.

2.
Under IAS 17 the total finance charge should be spread in such a way as to produce a constant periodic rate of interest on the remaining balance of the liability.
However, IAS 17 also allows for some form of approximation to be used to simplify the calculation.

Fully accurate calculation bases for spreading the total finance charge include the Actuarial method.
The Sum of the digits method is simpler to apply, and will normally produce a close approximation.

International Accounting Standard 18, dealing with accounting for revenue.
Issued by the International Accounting Standards Board.

International Accounting Standard 19, dealing with employee benefits.
Issued by the International Accounting Standards Board.

International Accounting Standard 20, dealing with accounting for government grants and disclosure of government assistance.
Issued by the International Accounting Standards Board.

International Accounting Standard 21, dealing with the effects of changes in foreign exchange rates.
Issued by the International Accounting Standards Board.

International Accounting Standard 23, dealing with borrowing costs.
Issued by the International Accounting Standards Board.

International Accounting Standard 24, dealing with related party disclosures.
Issued by the International Accounting Standards Board.

International Accounting Standard 26, dealing with accounting and reporting by retirement benefit plans.
Issued by the International Accounting Standards Board.

International Accounting Standard 27, dealing with separate financial statements.
Issued by the International Accounting Standards Board.

International Accounting Standard 28, dealing with investments in associates and joint ventures.
Issued by the International Accounting Standards Board.

International Accounting Standard 29, dealing with financial reporting in hyperinflationary economies.
Issued by the International Accounting Standards Board.

International Accounting Standard 31, dealing with interests in joint ventures.
IAS 31 is superseded by IFRS 11 'Joint Arrangements' and IFRS 12 'Disclosure of interests in other entities' with effect from January 2013.

International Accounting Standard 32, dealing with financial instruments: presentation.
Issued by the International Accounting Standards Board.

International Accounting Standard 33, dealing with earnings per share.
Issued by the International Accounting Standards Board.

International Accounting Standard 34, dealing with interim financial reporting.
Issued by the International Accounting Standards Board.

International Accounting Standard 36, dealing with impairment of assets.
Issued by the International Accounting Standards Board.

International Accounting Standard 37, dealing with provisions, contingent liabilities and contingent assets.
Issued by the International Accounting Standards Board.

International Accounting Standard 38, dealing with intangible assets.
Issued by the International Accounting Standards Board.

International Accounting Standard 39, dealing with financial instruments: recognition and measurement.
To be superseded in due course by IFRS 9 'Financial Instruments'.

International Accounting Standard 40, dealing with investment property.
Issued by the International Accounting Standards Board.

International Accounting Standard 41, dealing with agriculture.
Issued by the International Accounting Standards Board.

International Accounting Standards Board.

UK Tax.
Industrial Buildings Allowance(s).

International Bank Account Number.

International Banking Facilities.

InterBank Offered Rate.

International Bank for Reconstruction and Development.

1. Investment Committee.

2. Integrated Circuit. As in Integrated Circuit card.

3. Introductory Commission.

Integrated Circuit card.

The Institute of Chartered Accountants in England and Wales.

The Institute of Chartered Accountants of Scotland.

Independent Commission on Banking.

Integrated Circuit Card.

International Commodities Clearing House.

InterContinental Exchange.

International Capital Market Association.

International Central Securities Depository.

The UK Income and Corporation Taxes Act 1988.

In the Capital Asset Pricing Model, same as Specific risk.

Funds left in low or non-interest bearing accounts.

International Financial Reporting Interpretations Committee. Renamed the International Financial Reporting Standards Interpretations Committee.

International Financial Reporting Standard(s).

International Financial Reporting Standard 1, dealing with first-time adoption of international financial reporting standards.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 2, dealing with share-based payment.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 3, dealing with business combinations.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 4, dealing with insurance contracts.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 5, dealing with non-current assets held for sale and discontinued operations.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 6, dealing with exploration for and evaluation of mineral resources.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 7, dealing with financial instruments: disclosures.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 8, dealing with disclosure of information regarding each operating segment.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 9, dealing with financial instruments.
IFRS 9 is designed to evolve and to replace IAS 39 'Financial Instruments: Recognition and Measurement' in due course.

International Financial Reporting Standard 10, dealing with consolidated financial statements.
Issued by the International Accounting Standards Board.

International Financial Reporting Standard 11, dealing with accounting for joint arrangements.
IFRS 11 supersedes IAS 31 'Interests in Joint Ventures' with effect from January 2013.

International Financial Reporting Standard 12, dealing with disclosure of interests in other entities.
IFRS 12 supersedes IAS 31 'Interests in Joint Ventures' with effect from January 2013.

Issued by the International Accounting Standards Board.

International Financial Reporting Standard 13, dealing with fair value measurements.
Issued by the International Accounting Standards Board.

An independent body established to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB and its interpretative body the IFRS Interpretations Committee.

The body of the International Accounting Standards Board (IASB) which interprets the application of IASs and IFRSs and provides guidance on financial reporting issues not specifically addressed in IASs and IFRSs.

Previously called the International Financial Reporting Interpretations Committee (IFRIC).

Interbank Funds Transfer System.

International Group of Treasury Associations.

In-house bank.

A security or a market that is lacking activity.

Insurance-linked securities

International Monetary Fund.

International Monetary Market.

Institutional Money Market Funds Association.

1. With respect to a portfolio of liabilities, the investment in a portfolio of assets with the same modified duration such that a change in interest rates will cause no change in the net value of the assets and liabilities in combination.

2. Similar risk management techniques in relation to other market rates or market prices.

Alternative spelling of Immunisation.

1. Financial reporting.
A reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.

2. The related accounting adjustment required to reduce the carrying amount of the asset in the balance sheet - to the new lower recoverable amount - and to recognise an impairment loss.

3. More generally, any weakening, damage or reduction in value.

1. Finance lease accounting.
The internal rate of return of the finance lease cash flows, normally used to allocate the finance charge.

2. The internal rate of return of any set of cash flows.

Law.
A provision of a contract not expressly agreed to by the parties in words but either regarded by the courts as necessary to give effect to their presumed intentions or introduced into the contract by statute. Certain implied terms cannot be excluded even by express agreement of the parties.

The volatility of the market price of the asset, liability or index underlying a derivative, which is derived from the option pricing formula and the anchor price of the option itself.

1. Goods and services produced abroad, which are purchased domestically.

2. VAT.
The movement of goods into the EU.

Tax.
A system adopted in the UK and most other EC countries, which wholly or partially imputes to the shareholders some of the corporation tax paid by companies on the income out of which dividends are paid.

The mechanism for imputation is a tax credit given to the shareholders at the time of a dividend, which can be used in full or partial payment of the individual's income tax liability.

(By contrast, 'classical system' tax rules - for example in the US - do not normally give any credit to individual investors for the corporate tax already paid by the corporations in which they have invested. This results in the effective double taxation of the related business profits.)

Law.
Of a decision, a precedent the point of law of which is the same as or sufficiently similar to the significant facts of those of a later case (which must therefore be decided in the same way, unless by a higher court).

(ITM).
1. An option is in the money for the holder when immediate exercise of the option would result in a gain for the option holder.

2. A derivative such as a swap is in the money when, for example, the swap rate is favourable compared with the current market rate, so that the net present value of the derivative is positive.

The amount of monetary or other returns that a person or organisation receives either as a reward for effort such as a salary or as a return on investments such as interest.

Economics.
The percentage change in quantity demanded divided by the percentage change in income.

Accounting.
(IS).
International Accounting Standards (IAS) and US term for the UK Profit and loss account, that sets out how the net profit is arrived at.

One of the IAS Primary statements.

Under the 'double entry' accounting convention, income items in the Income statement are Credits (CR) and expenses are Debits (DR).
A net profit for the period under review is a Credit in the Income statement.
A net loss for the period is a Debit in the Income statement.

Net profits or losses for the period - in the Income statement - feed through in turn to the Shareholders' funds (cumulative retained profits or losses) in the 'bottom half' of the Balance sheet (as at the end of the period).

1.
Foreign exchange risk.
Arises as a result of the process of translating income statement items denominated in foreign currency into group income statements denominated in the parent currency.
This is a form of foreign exchange Translation exposure.

2.
More generally, the risk of adverse effects in the income statement arising from foreign exchange risk or from other sources.

(IT).
1. A UK tax charged on most sources of income, attributed to an individual in a given fiscal year.

2. More generally, a tax on individual or corporate income. For example US Federal Income Tax.

A currency that cannot be converted into other currencies because of exchange control restrictions.

Intangible property such as copyrights, patents and trademarks.

In financial decision making, the incremental cash flows are those which will be different, depending on whether or not the decision is implemented.

It is only the incremental cash flows which should theoretically be taken account of in making the related financial decision.

For example, 'Sunk costs don't count'.

Risk management.
A measure of the Value at Risk (VaR) impact on a portfolio of adding or removing a position.

Loan documentation.
A covenant which has to be met initially and on certain other trigger events, for example raising new borrowings, acquisitions or dividend payments, where the event is permissible if the covenant test is met after the event has been taken into account.

An obligation of one party to reimburse another party for losses which have occurred or which may occur.

Contract law.
A term in a contract whereby one party seeks to transfer liability for contractual problems to another person.

Borrowings documentation.
Bond indenture.

1. Thinking and acting without the influence of others.

2. One of the principles of the ACT's Ethical Code.

(ICB).
A commission established in 2010 to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition.

Its final report was published in September 2011 leading to the drafting of the Financial Services (Banking Reform) Bill.

Statistics.
Two events are statistically independent if the outcome of one of the events has no effect on the probability of the outcome of the other event.

1. A number showing the variation in price of a group of securities with respect to a chosen base period.

Indices may be calculated as arithmetical or geometric averages and individual components may be weighted, for example by market capitalisation.

For example the FTSE 100 or the S&P 500.

2. A comparable measure in relation to any set of data. For example, inflation indices.

A security paying a coupon that varies according to some underlying index (often called index linkers) - not a fixed, nominal coupon nor a coupon at a margin above a published reference rate.

The most common class of index linked bonds are inflation linked bonds paying a coupon linked to inflation so as to provide a real return.

For example UK Index Linked Gilts or US Treasury Inflation Protected Securities (TIPS).

An index linked bond.

Index numbers measure changes occurring in data over a period of time.

UK Tax.
Allowance based on the rise in the UK retail prices index (RPI) and is aimed at giving tax relief for the effects of inflation on the disposal of an asset subject to capital gains tax rules.

A criminal offence which is heard before a judge and a jury.

Economics.
A graphical representation of different levels of consumption of two goods which provide the consumer with the same utility.

Costs of a business that cannot be directly associated with the production of a particular unit or type of product.

In relation to a Cashflow statement, starting with a reported profit/(loss) figure and then adjusting it to calculate the net cash movement.

(The alternative Direct method shows all categories of receipts and payments explicitly.)

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

Funds transfer.
An indirect participant in an IFTS (Interbank Funds Transfer System) is one which does not settle its own payment on a gross or net payment basis and, therefore, settles them through a direct participant.

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

A tax which is levied on expenditure (rather than on profits or gains).

UK Tax.
(IBA). Capital allowances formerly available on industrial buildings.

Pensions.
A multi-employer occupational pension scheme open to employees of different and otherwise unconnected employers, but working in a common industry (for example the rail operators), or whose employers are members of a particular professional body or trade association.

Also known as an Umbrella scheme.

See Efficient market hypothesis.

Portfolio analysis.
An inefficient portfolio is one which does not lie on the efficient frontier. In other words an inefficient portfolio has either lower expected return than another of equal risk, or else greater risk for equal expected return compared with another - more efficient - portfolio.

Inefficient portfolios are said to be 'dominated' by at least one other relatively more efficient portfolio.

Economics.
Where the percentage change in quantity (either demanded or supplied) is less than the percentage change in price.

Economics.
A product for which quantity demanded decreases as income increases.

1. The rate at which prices are rising. Usually measured in the UK by the consumer price index (CPI).

2. A situation in which prices generally are rising. This is the usual situation in most developed economies at most times. Contrasted with the more unusual situation of Deflation, when prices generally are falling.

The risk of adverse effects resulting from increases in prices, either prices generally or those of particular classes of goods or services.

(IT). The study, design, development, implementation, support or management of computer-based information systems.

UK Tax.
(IA). The formerly available Industrial Buildings Allowance (IBA) equivalent of a first year allowance.

In futures markets, a refundable cash deposit required from participants to protect other participants in the market against the risk of a default.

(IPO).
1.
The first sale of shares by a private company to the public.

2.
More broadly, the term sometimes refers to offerings of shares to selected institutional investors (also known as a placing) leading to the company's shares being listed on a public market.

3.
More broadly still, any corporate activity leading to a company's securities becoming traded in the public markets.

IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be used by large privately owned companies looking to become publicly traded.

Economics.
Income which flows to firms from sources other than household expenditure, for example, investment, government spending and exports.

Law.
1. A court order prohibiting a party from doing or continuing to do a certain activity. This is the most usual type of injunction.

Also known as a Prohibitory injunction.

2. A similar court order requiring a party to carry out a certain act.

Also known as a Mandatory injunction.

UK Tax.
(IR). The UK government department formerly responsible for the assessment and collection of all direct taxes.

Now merged with the former Customs & Excise department, within Her Majesty’s Revenue & Customs (HMRC).

A measure of the change in prices of materials and fuel bought by manufacturers.

UK VAT.
The VAT on goods or services into a business.

Dealing in company securities with a view to making a profit or avoiding a loss while in possession of information that, if generally known, would affect their price.

In the modern era, insider dealing is now illegal in fully developed markets. However, many commentators believe that the crime remains widespread, because of the difficulties of detecting it and of proving it in law.

Inability to pay financial obligations as they fall due.

(IA). Key UK legislation relating to insolvency.

Corporate finance.
The same as costs of financial distress.

An insolvency professional in the UK who is either authorised by the Secretary of State for Business, Innovation & Skills or licensed by a recognised professional body.

An executive agency of the Department for Business, Innovation and Skills which deals with the investigation and administration of bankrupt businesses.

The Service employs the Official Receiver.

The chartered professional body for actuaries in the UK.

Formed from the merger of the Institute of Actuaries and the Faculty of Acutaries.

(IOA). Formerly one of the two professional actuarial bodies in the UK, based in London - the other one being the Faculty of Actuaries.

Now merged with the Faculty of Actuaries to form the Institute and Faculty of Actuaries.

(IMMFA). The trade association for providers of triple-A rated money market funds within Europe.

Its members currently have funds domiciled in Dublin, Luxembourg and the Channel Islands.

1. A generic term for securities and risk management contracts ranging from debt to negotiable deposits and bonds and including derivatives. Normally used to describe financial arrangements with short-term maturities.

2. A tool used by government in achieving its macroeconomic targets, for examples interest rates.

3. Abbreviation for financial instrument.

In relation to risk, an insurable risk is one for which insurance can be bought in the market (for a fee usually known as a premium).

A contract designed to provide protection against specified types of risk or loss, by paying out to the insured party in the event that the insured loss occurs.

Insurance is generally provided by specialist insurance companies, to whom an insurance premium is paid by the insured in advance.

1. To buy a contract of insurance, as the insured party.

2. To sell a contract of insurance, as the insurance provider.

A pension scheme (usually defined benefit) where the sole investment medium is an insurance policy.

Accounting.
Assets that are considered to be long-term assets but are intangible in nature, such as the value of patents and goodwill generated by the business.

Intangible assets.

(ICC/IC Card). Any pocket-sized card with embedded integrated circuits in plastic cards with embedded integrated computer chips.

Also known as a smart card or chip card.

Money laundering.
The conversion of laundered money into assets which have the appearance of having been legitimately acquired.
This is a common third stage of money laundering, following 'placement' and 'layering'.

1. Acting honestly and in good faith.

2. One of the principles of the ACT's Ethical Code.

Copyrights, patents, trademarks and other similar and related rights.

Statistics.
The distance between the upper and lower quartile.

Dealing between different financial institutions including banks(rather than between banks and their corporate or retail customers).

(IFTS). A funds transfer system in which most (or all) direct participants are credit institutions.

(IBOR). The rate of interest at which the quoting bank offers to lend to other first class banks.

For example LIBOR, the London InterBank Offered Rate

The market rates at which high quality banks deal when trading amongst themselves.

Data presentation.
1. The point at which a line or curve touches an axis on a graph.

2. The point at which one line or curve touches another.

Loans and deposits made between corporate treasuries and their affiliates and subsidiaries worldwide.

Transactions resulting from members of groups of companies trading with each other.

(NYSE: ICE). An American financial company that operates internet-based marketplaces which trade futures and over-the-counter, energy and commodity contracts as well as derivative financial products.

The amount, usually expressed as an annual percentage of the principal, charged for borrowing money or earned from a fixed income investment or from a floating interest rate investment.

The international transfer of funds to a foreign centre, or the maintenance of funds in a foreign centre with the intention of benefiting from the higher yield on short-term investment in that centre.

Securities that pay interest at a specified rate either at periodic intervals or at maturity.

Instruments that are always issued in interest bearing form include Certificates of Deposit.

Instruments that may be issued either in interest bearing form or as discount instruments include Sterling commercial paper.

Pensions.
The increase in Projected Benefit Obligation that would arise simply as a result of the time value of money.

1.
From a whole-firm perspective, interest cover is the ratio of Profit before interest and tax ÷ Interest payable.
Interest cover measures the safety or sustainability of the future debt servicing flows, from the perspective of the lenders.

The greater the interest cover ratio, the greater the likelihood that the firm paying the debt interest (and other debt servicing costs) will continue to be able to service the debt in the future. So a higher cover ratio is associated with lower risk for the debt investors.

In the theoretical situation where the cover ratio fell below 1.0, the interest would be said to be uncovered and the debt would not be sustainable at its previous level unless there was a recovery in the firm's operating profitability.

In practice lenders want much higher minimum interest cover ratios than 1.0, such higher minimum usually stipulated in the related loan documentation. So the borrower in this situation would be likely to be already in breach of a related borrowings covenant.

Also known as the Interest cover ratio.

2.
An analogous measure, in relation to an individual tranche or class of debt (rather than to the whole firm).

Notional pooling.

The rate of return receivable from lending money to another party, or the rate payable on a borrowing.

In wholesale markets, the market interest rates are conventionally quoted on a per annum basis.

An agreement whereby the seller of the cap agrees to compensate the buyer if interest rates rise above an agreed rate on a series of pre-agreed dates.

A combination of a cap and a floor.

The difference between short-term interest rates prevailing in two money centres at a given moment.

A cash management practice that acts as a substitute for notional pooling in several European countries where tax or regulatory constraints limit the potential for cost-effective notional pooling.

As is the case for notional pooling, interest rate enhancement aims to view the account balances of a company or its subsidiaries as a whole for the purposes of interest calculation.

However, unlike notional pooling, there is no formal scheme set up to allow the systematic offsetting of the various participant’s credits and debits.

Also known as Interest rate netting or interest rate optimisation.

A measure of the potential cost to a business of adverse changes in market interest rates.

An agreement whereby the seller of the floor agrees to compensate the buyer if interest rates fall below an agreed rate on a series of pre-agreed dates.

Financial futures whose prices and settlement are based on specified market interest rates.

(IRG).
This is an option on a specified short-term interest rate for a specified notional loan or deposit.

A borrower normally wants a guarantee that their hedged rate payable will be 'no higher than' a specified worst case rate.

A lender or investor normally wants a guarantee that their hedged rate receivable will be 'no less than' a specified worst case rate.

Also known as Interest rate enhancement.

Also known as Interest rate enhancement.

(IRO).
An option relating to interest rates.

Historically this was the right but not the obligation to borrow/lend a specified amount at a specified rate for a specified period.

More commonly in practice the option is cash-settled based on the difference between the option strike rate and the current market rate.

(IRP).
This theory describes the expected relationship between spot and forward forward exchange rates, and the interest rates in the related currency pair.

Under efficient market conditions the interest rate parity theory predicts that the forward FX rate (available in the market today) should be equal to the spot FX rate, adjusted for the difference in interest rates between the currency pair over the relevant period.

The risk associated with a change in interest rates.

This may take several forms; increasing interest cost, changing market value of debt or of pensions liabilities, differences in competitiveness, or the changing nature of a market when interest rates change.

(IRS). A longer-term interest rate derivative.
An IRS is similar in its effect to a Forward Rate Agreement (FRA).
An IRS - like an FRA - is a contract for differences based on an agreed market interest rate.

But the IRS usually has multiple future interest calculation and settlement dates, and is used by a corporate to hedge or transform longer term interest rate exposures.

For example, an interest rate swap might be used to transform a longer term floating rate borrowing into a synthetic fixed rate borrowing.

(Whereas an FRA is for the shorter term and for a single settlement receipt or payment.)

Other forms of capital market swap have been developed for the exchange of many other different types of cash flows and are used widely to hedge or transform a wide variety of related underlying exposures.

Method used for calculating interest whereby the interest rate is determined by the level of balances, for example, higher balances attract higher rates.

The ratio of the coupon on a security to its market price, expressed as a percentage.

Also known as the current yield or the running yield.

Securities that pay interest at a specified rate either at periodic intervals or at maturity - unlike discount instruments, where the return is earned by the increase in value to the redemption amount, from the discounted amount of the initial investment.

Law and pensions.
A deed covering the key clauses only of a proposed trust arrangement, usually drawn up for the purpose of gaining Her Majesty's Revenue & Customs approval.

Credit transfer.
Within the TARGET system, the interlinking mechanism provides common procedures and the infrastructure which allow payment orders to move from one domestic Real-time gross settlement system (RTGS) to another domestic RTGS system.

A vehicle company used as a conduit for the transfer of funds between fellow affiliate companies.

The activity of a bank or similar financial institution in taking a position between the two parties to a transaction in such a way as to accept a credit or other commercial risk.

Financial intermediation commonly refers to the process of channelling funds between lenders and borrowers.

Tactics related to the business of the multinational which do not use third-party contracts but are aimed at reducing exposed positions or preventing exposure from arising or exploiting possible future exchange rate movements.

A factoring arrangement in which a designated corporate affiliate or subsidiary buys accounts receivable from an exporting subsidiary and collects from an importing subsidiary.

(IRR).
1.
The internal rate of return of a set of cash flows is the cost of capital which, when applied to discount all of the cash flows (including any initial investment flow at Time 0) results in a Net Present Value (NPV) of NIL.

For an investor, the IRR of an investment proposal therefore represents their expected rate of return on their investment in the project.

For example a project requires an investment today of $100m, with $110m being receivable one year from now.

The IRR of this project is 10%, because that is the cost of capital which results in an NPV of $0, as follows:

PV of Time 0 outflow $100m = $(100m)
PV of Time 1 inflow $110m = $110m x 1.1^-1 = $100m
NPV = -$100m +$100m = $0.

2.
It is normally only possible to determine IRR by trial and error (iterative) methods.

For example using straight line interpolation and the following data:
First estimated rate of return 5%, NPV $+4m; and
Second estimated rate of return 6%, NPV $-4m;
The straight-line-interpolated estimated IRR is the mid-point between 5% and 6%, namely 5.5%.

Using iteration, the straight-line estimation process could then be repeated, using the value of 5.5% to recalculate the NPV, and so on.

The IRR function in Excel uses a similar trial and error method.

3.
In simple IRR project analysis the decision rule would be that all opportunities with above the required IRR should be accepted, and all other opportunities should be rejected. However this assumes the unlimited availability of further capital with no increase in the cost of capital.

A more refined decision rule is that all opportunities with IRRs BELOW the required IRR should still be REJECTED while all other opportunities remain eligible for further consideration (rather than automatically being accepted).

US Tax.
(IRS). The central tax authority in the United States.

Accounting.
Sales and purchases between companies within the same accounting group.
Due to internal management reasons and tax transfer pricing regulations it is unlikely in practice that the sale of goods between two group companies would be at cost. The seller would make its normal profit on the sale.
This would be a genuine profit in the accounts of the seller. However if the buyer has not sold the goods they have not left the group, and viewing the group as a single entity, no profit should be recognised.
A single entity cannot make a profit from selling goods to itself. The profit is said to be unrealised from the group perspective.
For this reason any profits or gains on internal trading are removed from the group accounts on consolidation.

Also known as internal transfers.

Accounting.
Sales and purchases between companies within the same accounting group.
Also known as internal trading.

The practice where customer trades are executed internally within a brokerage or through intermediaries rather than through an exchange. The brokerage keeps any money it may make on the spread (the difference between the purchase price and the sale price ).

Same as Internalisation.

(IAS). International Financial Reporting Standards.

(IASB). An independent, privately-funded accounting standard-setter based in the UK. It is committed to developing a single set of high quality, understandable and enforceable global accounting standards.

In addition, it co-operates with national accounting standard-setters to achieve convergence in accounting standards around the world.

It works within the IFRS Foundation.

(IBAN). An internationally agreed International Organisation for Standardisation (ISO) standard, IBAN is an international account identifier used internationally to uniquely identify the beneficiary bank account number in cross-border payments.

(IBRD). One of five institutions that make up the World Bank Group. Its aim is to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development.

(IBFs). Free monetary zones in the United States that can be established by certain corporations and by US branches and agencies of foreign banks.

The IBFs accepting foreign deposits are exempted from reserve requirements and interest rate restrictions and can make loans to foreign borrowers. The impact of their operations is that some dollars deposited in time deposits in the United States effectively become Eurodollars.

1.
Formerly (and still commonly) known as a Eurobond.
An offshore bond, normally issued in a Eurocurrency, in the international capital markets.
Maturities at issue are normally greater than one year.
They are usually - but not always - in bearer form.
They can be issued on any interest basis.

2.
Any bond issued outside the country of domicile of the issuer.

3.
The term is also sometimes used (incorrectly) to refer to a global bond.

(ICMA). A self-regulatory organisation and trade association for participants in the capital markets.

(ICSD). A central securities depository that provides clearing and settlement facilities for cross-border transactions in domestic securities and/or international securities transactions.

(ICCH). The central guarantee organisation which clears contracts on the London International Financial Futures Exchange (LIFFE).

(IFRIC). The IFRIC replaced the former Standing Interpretations Committee (SIC). The IFRIC was renamed the IFRS Interpretations Committee in March 2010.

(IFRS). The system of financial reporting required for all companies quoted on an EU stock Exchange from January 2005.

The system operates via accounting standards (International Accounting Standards or IAS) issued by the International Accounting Standards Board (IASB).

This theory predicts that the spot foreign exchange rate will change over time to reflect and offset differences in interest rates in the respective currencies.

So for example, unhedged currency depreciation losses will on average negate and match exactly any gains on interest differentials between the two currencies.

A fund which invests in securities outside the country of the investor.

(IGTA). Forum for National Treasurers Associations around the world.

Details of IGTA's work can be found at: www.igta.org.

(IMF). An international organisation created by the Bretton Woods Agreement in 1944 to promote exchange rate stability.

The objectives of the Fund include supervising exchange market intervention of member countries, providing the financing needed by members to overcome payments imbalances, encouraging monetary cooperation and international trade among nations, promoting sustainable development and poverty reduction.

(IMM). A division of Chicago Mercantile Exchange (CME), the largest futures exchange in the United States. Here currency and financial futures contracts, among others, are traded.

The market that handles international currency transactions between the various central banks of nations.

Transactions are carried out mainly in gold or US dollars.

(IOSCO). An international organisation that brings together the regulators of the world’s securities and futures markets.

(IP). A pre-printed paper form containing credit transfer instructions which, combined with an invoice, allows the recipient to effect an automated credit transfer.

IPs are generally used on a cross-border basis.

(ISDA). Now called the International Swaps and Derivatives Association.

(ISDA). The industry body responsible, among other things, for standardising swap documentation.

The terms of swaps are normally governed by a minimum of two documents: a Master Agreement (often referred to simply as an ‘ISDA’) and a confirmation of the specific details of a particular trade (the ‘confirmation’).

Formerly the International Swap Dealers Association.

A wide area network (WAN) to which anyone with the appropriate hardware, software, and communication links has access.

(IP). A protocol that, in combination with Transmission Control Protocol (TCP), allows the transmission of data over networks.

IP/TCP has, in practice, become the industry standard.

1.
A straight-line estimation method where the estimated result lies in between two known data points.

Also known as Linear interpolation.

2.
More generally, any estimation method where the estimated result lies in between two known data points. (Not necessarily using straight-line methods of estimation.)

Data presentation.
The point at which one line or curve crosses (intersects with) another.

Within the legal power or authority of a person, official or body.

Daylight credit.

A local area network (LAN) or wide area network (WAN), typically belonging to one company, which uses the open standards of the internet rather than proprietary software for communication among computers.

1. The component of a the value of an option which relates to the gain - if any - which could be earned by immediate exercise of the option.
For a call option this is the excess - if any - of the underlying asset price over the strike price.
For a put option it is the excess - if any - of the strike price over the underlying asset price.

2. The value of any financial asset determined by reference to the present value of its expected net future cash flows.

3. More generally, the value of any asset determined by reference to its particular fundamental characteristics, rather than by reference to current market prices.

A method of obtaining a listing on a stock exchange, without the issue of new shares.

Its availability is limited to companies whose shares are already held by a sufficiently wide base of shareholders, and which also meet all of the other criteria for a listing.

IC.
A commission payable for making an introduction.

For example a commission payable to an antiques valuer for introducing a client to a particular auction house.

1. Raw materials, components, work in progress (WIP) and finished goods held by a company or other entity under review.

2. Accounting.
Value of raw materials, components, work in progress (WIP) and finished goods held by a reporting entity at a balance sheet date.

Also known as Stock.

In simple terms, if inventory levels are too high, significant investment and storage costs will be incurred.
But if inventory levels are kept too low, the chance of inventory running out and lost sales will increase.

Effective inventory management - among other things - identifies an appropriately balanced level of inventory.

Inventory turnover ratio.

An example of an activity ratio or management efficiency ratio. The inventory turnover ratio indicates the number of times stock is completely replaced in a year.

It is calculated as:

[Cost of sales]/Inventory.

1.
A mathematical function which reverses another function.
For example the square root function x^(1/2) is the inverse function of the square function x².
Another example is the Natural logarithm (log to the base 'e') which is the inverse function of the exponential function e^x.

2.
The function 1/x, also written x^-1.
(As it happens, the inverse function of 1/x - in the first sense above - is itself, namely 1/x.)

Foreign exchange.
See Inversion.

A situation in which market interest rates for longer term funds are lower than those for shorter maturities.

1.
A term used in foreign exchange rate quotation.

Consider the historical FX quote of 1 GBP = USD 1.4598 - 1.4602.
The base currency is GBP.

The inversion of this FX quote means expressing the same price, but with the other currency as the base currency (USD here).

So 1 USD = GBP [1/1.4602] - [1/1.4598]
1 USD = GBP 0.6848 - 0.6850.

2.
In any market, the reversal of a normal - or commonly expected - relationship.

For example the situation of an Inverse yield curve, where longer maturities of funds are trading at LOWER yields than shorter-dated maturities (being the opposite of the normally expected upward-sloping relationship).

Accounting.
Cash flows from investing activities are those from resources for future cash generation.

1. Economics.
Expenditure by firms on (or creation by firms of) capital goods and stock to be used for future production or sale.

2. More generally, the expenditure of money or money's worth with a view to increasing over time the value so invested.

The process of determining whether an expected return is sufficient to justify the investment required to achieve that return, given the risk and the time delay associated with the expected return.

These banks provide a wide range of services in the money, capital and securities markets.

1. (ICs). A representative grouping through which external institutional investors express their collective views to the senior management of the firms in which they hold significant investments.

The ICs consist principally of the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF).

2. A committee which advises internally on the investment policy selected and implemented by a particular body or institution.

For example, the investment committee of an individual pension fund.

A company which makes and manages investments.

Credit rating.
The highest credit ratings, from BBB- (Baa3) and higher for longer term obligations.

A bond that is relatively safe, having a high bond rating.

Any party that makes an investment.

Economics.
The net amount of imports LESS exports of services, interest, profit and dividends from financial activities and government current account items as reported in the balance of payments.

In contract law, an indication of a willingness to consider offers.

In the US, known as an Invitation to bargain.

1. A claim for payment by a creditor usually in the form of a document issued by the seller to a buyer listing the goods or services supplied and stating the sum of money due.

2. To present a customer with an invoice.

A form of short term finance secured against trade accounts receivable.

Under invoice discounting, the customer which owes the trade debt is not informed about the related finance arrangement. In this respect it differs from factoring, under which the customer is made aware of the factoring arrangement.

Bond pricing.
Dirty price.

Institute of Actuaries.

International Organization of Securities Commissions.

1. Internet Protocol.

2. International Payment instruction.

Initial Public Offering.

Intellectual Property Rights.
Including copyrights, patents, trademarks and other similar and related rights.

UK Tax.
The former UK Inland Revenue. Now merged within Her Majesty’s Revenue & Customs (HMRC).

Interest Rate Guarantee.

Interest Rate Option.

Interest Rate Parity.

Internal Rate of Return.

1.
Economics.
Market behaviour or other economic behaviour which is not wealth-maximising under traditional economic models.

2.
Maths.
An irrational number is a number which cannot be expressed as a simple fraction.

Also known as Perpetual bond.

A transfer which cannot be revoked by the transferor and which is final.

Letter of credit than cannot be amended or cancelled without the agreement of all parties involved.

1. Interest Rate Swap.

2. US Tax.
Internal Revenue Service.

Income Statement.

International Swaps and Derivatives Association.
Formerly known as the International Swap Dealers Association.

ISDAFIX is a benchmark reference rate for annual swap rates in CHF, EUR, GBP, JPY, USD and (historically up to April 2013) HKD.

Its uses include calculating:
1. Cash settlement amounts on the early termination of swaps.
2. Exercise values for cash-settled swap options.
3. Mark to market valuations for swaps and other derivatives.

ISDAFIX is calculated and published daily.
Published maturities differ slightly by currency, for example in USD they are: 1-10 years inclusive, 15, 20, and 30 years.

Sometimes written ISDA FIX, ISDAFix or ISDAfix.

In Islamic finance and banking products, profit must be derived from commercial risk-taking and trading only, and all forms of interest are prohibited.

Islamic finance models therefore operate on the basis of risk sharing, to encourage operational investments which may be of benefit to the community.

Furthermore, commercial investments should only support practices that are permitted. Thus, for example, trading in alcohol, pornography, financial services, pork, armaments, tobacco and gambling are not allowed.

The process of creating a new issue of securities or of creating and releasing new securities within an existing issue.

1. The creation of new securities by a private or public entity in exchange for cash or assets. An issue can involve one or more types of debt and/or equity security.

2. The class of securities so created.

The price at which securities are sold on issue.

The total nominal value of the shares of a company which have been issued to shareholders and which remain outstanding (have not been redeemed or repurchased to be held in treasury).

A company or other entity that borrows or raises capital via the financial markets through the issuance of securities.

Bank that issues a letter of credit.

The issuing bank is obligated to pay if documents are presented that comply with the letter of credit.

An institution or agency that organises the arrangements associated with an issue of securities.

1. Income Tax.

2. Information Technology.

A repeated calculation process in which the results or other outputs from the earlier runs are used directly as inputs - or to calculate the inputs - for subsequent runs of the calculation.

Iteration is particularly useful for solving problems which cannot be solved by simple formulae or other algebraic methods.

For example calculating the internal rate of return for more complex sets of project cash flows.

1. International Treasury Management.

2. In The Money.