Glossary of Terms

Statistical sampling technique where a sample is chosen such that each possible sample has an equal chance of being selected.

1. Statistics. The difference between the highest and lowest items within a distribution.

2. More generally, a group of related items with differing individual characteristics.

An option hedging strategy, the same as a Collar.

The percentage return on an investment.

An amendment, in accordance with a specific formula, in the rate of interest applied to an adjustable rate debt security.

Independent organisations that assess credit quality of corporate and government debt. The main agencies are Moody’s, Standard and Poor’s and Fitch.

A formal indication by a credit rating agency that it anticipates a change in a credit rating at some time in the foreseeable future.

A system of assessing and communicating credit quality for specific debt issues. The process is undertaken by rating agencies.

A clause in loan documentation which changes the obligations of the borrower, in the event of a change in credit rating.

1. See Ratio analysis.

2. Law. Abbreviation for Ratio decidendi.

A method of financial analysis using financial ratios; comparing various accounting items with each other as ratios.

Law. The underlying principle of law in a particular legal case (or other legal decision).

(Often abbreviated in discussions between lawyers to 'ratio'.)

Regional Cheque-Processing Centre.

A company, typically established in a low tax domicile, to which members of a group sell their goods and services for onward sale to third party customers. This method is often used by a group in order to concentrate its currency exposures.

1. A term which has been restated to exclude the effects of inflation. For example, if £100 is invested for a year at a nominal rate of 10% and inflation is 2%, we can say that the nominal rate is 10% but the real rate is only (1.10/1.02) - 1 = 7.84%. This is because goods which cost £100 today will cost £102 in a year's time.
Therefore only a 7.84% return has been made if we take into account the new prices of goods.

2. Inflation-proof.

3. Tangible. For example the real assets of a business would include its stock, plant and machinery.

4. Real property means land and buildings.

5. Real-life issues and opportunities are those with a strong foundation in practical experience. (Contrasted with other issues which are considered to be more theoretical.)

A rate which has been restated to exclude the effects of inflation.

(RTGS). Funds transfer. A gross settlement system in which processing and settlement take place in real time (continuously).

Funds transfer. See Real-time transmission, processing or settlement.

Funds transfer. See Real-time transmission, processing or settlement.

Funds transfer. See Real-time transmission, processing or settlement.

The transmission, processing or settlement of a funds or securities transfer instruction an individual basis immediately after the time at which it is initiated.

UK Tax. In relation to assets acquired before 31 March 1982, rebasing restates the value as of 31 March 1982.

1. A written acknowledgement by a receiver of money, goods or services, that payment or delivery has been made.

2. The act of receiving or fact of being received.

Basic method for short-term cash forecasting that uses schedules of cash receipts and cash disbursements.

Accounting. Amounts which are due to be received by a reporting entity.

If trade receivables are allowed to rise too high, the business will have to wait a long time before it receives cash from its customers for credit sales, resulting in the need for higher levels of capital investment in the business and increasing the risk of non-payment.

But if trade receivables are maintained at too low a level, less generous credit terms may drive customers away, resulting in lost sales.

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

A person appointed in the UK under the terms of a debenture or by the court to realise assets charged and to apply the proceeds for the benefit of those entitled. The receiver may also have power to manage the company.

Funds transfer. An analytical rather than operational or legal term used to describe the point at which an unconditional obligation arises on the part of the receiving participant in a transfer system to make final funds available to its beneficiary customer on the value date. See Final Settlement.

Output or economic growth decreases from one period to the next.

Accounting. A quantified explanation of the differences between two related amounts.
For example, an accounting reconciliation of operating profit to net operating cash flows. This statement explains why the figure for accounting profit differs from the net operating cash flows for the same period. Each item contributing to the net difference being quantified within the reconciliation statement.

Reconciliation checks are an important feature of internal control systems, to gain assurance about the accuracy of recording financial and other information.

A right of redress should a bill of exchange or other debt be dishonoured at its maturity. For example, a claim against an earlier holder of the bill.

A debt instrument which pays both periodic coupons and a redemption amount to the investor.

The purchase and cancellation of outstanding securities through a cash payment to the holder.

More specifically, the paying off or buying back of a debt security by the issuer on or before its stated maturity date. The redemption can be made at par value or at a premium, as is the custom when exercising a call option.

Same as Yield to maturity.

A prime bank whose quotations for deposits in a money market are used by an agent bank in determining the interest rate on a floating rate loan or instrument.

Same as Base currency.

1. The risk that an early unscheduled repayment of principal on mortgage-backed securities(MBS) will occur when the underlying mortgages are refinanced by borrowers. All MBS buyers assume some level of prepayments in their initial yield calculations, but an increase in the level of refinancing (which usually occurs as a result of falling interest rates) means that MBSs mature faster and will have to be reinvested at lower rates.

2. For a mortgage borrower, the risk that he or she will not be able to refinance an existing mortgage at a future date under favourable terms.

Abbreviation for Regulation Q.

The UK government department that receives all sets of annual financial statements and annual returns. It holds all such documents on public record.

A statistical technique that establishes the best linear relationship between the variable to be predicted from one or more input or explanatory variables.

USA. (Reg.Q). The Federal Reserve rule that prohibits the payment of interest on demand accounts in the USA.

Where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position.

(RNS). Operated by the London Stock Exchange (LSE), the Regulatory News Service is the mechanism to enable listed companies to issue announcements. The LSE provides all listed companies with the software to access the RNS.

1. The risk that transactions or business relationships may have unforeseen adverse regulatory consequences. For example, giving rise to additional costs or to the inability to enforce legal rights.

2. The risk that the administration of regulatory matters may be more costly - or otherwise more burdensome - than foreseen.

Regulatory risk usually refers to possible future changes in regulations. But it may also arise from misunderstanding of - or inadvertent non-compliance with - existing regulations and practice.

The risk of unfavourable changes in prevailing market returns at the time when maturing funds become available for reinvestment.

A method of centralising responsibility for monitoring and collecting international accounts receivable and improving foreign exchange exposure management.

Invoices received by a group subsidiary in a currency other than that of their operating company are accepted by the reinvoicing centre. The reinvoicing centre then issues an invoice on its behalf to the subsidiary in the subsidiary’s operating currency.

1. To relinquish an interest or claim to a piece of property.
2. In relation to information, to make the information available.

A legal procedure used to enforce a right or to redress an injury.

Payment for goods or services received or as an allowance particularly when sent by post.

International trade. In a documentary collection the exporter’s bank and the first bank in the chain of collection.

Funds transfer. The facility for a credit institution established in one country (home country) to become a direct participant in an interbank funds transfer system (IFTS) established in another country (host country) and, for that purpose, to have a settlement account in its own name with the central bank in the host country, without necessarily having established a branch in the host country.

A service that allows a company to deposit cheques by scanning them in their offices, and to create an image-based deposit that is then transmitted to the bank for posting.

Cash management technique to delay payments by writing cheques and drafts drawn on bank branches in remote locations.

Funds transfer. An institution established in one country (home country) which participates in a transfer system of another country (host country) without necessarily having established a branch in the host country. In the event that the remote participant has established a branch in the host country, it does not participate in the transfer system of the host country via this branch.

A payment carried out through the sending of payment orders or payment instruments (for example by mail).
Contrasted with face-to-face payment.

VAT. Penalty payable by HMRC if they take over 30 days to process a VAT repayment.

Repeated transfers in which the debit and credit parties and transaction description remain the same and only the amount and date of the transfer changes.
Also referred to as a template payment.

UK Tax. A mechanism whereby a chargeable gain arising on the disposal of an asset can be deferred if certain qualifying assets are purchased within a specified period of time of the disposal.

Also known as Close-out netting.

Pensions. The percentage of an individual's final salary at retirement received as annual retirement income (from whatever sources) and savings income.

A risk neutral method of valuing options and other financial instruments. For example a replicating portfolio for an option consists of a combination of the underlying asset and a risk-free borrowing or deposit, that produces the same payoffs at maturity as the option being valued. Applying no-arbitrage assumptions, the value of the replicating portfolio at Time 0 is therefore equal to the theoretical value of the option at Time 0.

Abbreviation for Repurchase agreement.

An alternative name for Annual report.

A quantitative ranking of a financial institution’s level of service and customer responsiveness. The use of report cards is widely applied to measure financial institutions’ service levels.

Financial reporting. The reporting unit for which financial information is summarised and presented. For example a company or a group of companies.

Documentation. See Representations and warranties.

A section of a loan agreement in which the borrower asserts the truth of information regarding the borrower's state of affairs. They generally assert that the borrower is empowered to borrow, that it is legally constituted and so forth. They may also assert that there is no legal claim against the borrower at the time of the agreement being made.

Whilst there are some technical differences between the effects of representations and of warranties, most loan agreements set out these clauses to be both representations and warranties.

Documentation. See Representations and warranties.

Contract law. See Repudiatory breach.

Law. The rejection or renunciation of a duty or obligation, for example, under a contract, amounting to a breach of contract.

Law. When a party bound by contract refuses to perform the contract or a significant part of it.

The purchase of securities (the collateral) by an investor from a bank or dealer and the related commitment by the bank or dealer to repurchase the securities at a pre-agreed price at an agreed future date.
Repurchase agreements are effectively a form of secured lending.

The risk of adverse consequences arising from a worsening of the reputation of a business. For example, as a result of adverse publicity.

(RFI). Banking. A semi-formal document that a company uses to confirm that use of a service provided is justified or to solicit ideas on how to solve a particular business or operational problem. The process helps to narrow down the list of banks that will be asked to bid.

(RFP). Banking. A formal tender which communicates a company’s requirements to the banks who are being asked to bid. The RFP is used to facilitate selection of a service or goods provider.

The legal remedy of cancelling, terminating or annulling a contract and restoring the parties to their original positions.

Banking. The minimum ratio of cash reserves to deposits that the central bank requires commercial banks to hold. An increase in reserve requirements will lower the supply of money in the economy as banks undertake less lending.

Accounting. This represents the amount of money ‘owed’ to the owner (shareholder) of the company.

Tax. For tax purposes, the main test for residence is the location of central management and control of the overall business. In practice it is usually determined by the place where the directors meet.

Bank accounts held by individuals or legal entities who are residents of the country in which these accounts are held.

Corporate finance. The residual theory relates to dividend policy. It states that a company should always invest in positive NPV projects, and then pay out any remaining surplus cash as dividends.

1. Financial reporting. The realisable value of an asset at the end of its useful economic life for the reporting entity, based on prices prevailing at the date of acquisition or revaluation where this has taken place.

2. More generally, the realisable value of an asset at the end of a period of use.

UK Tax. The residue before sale plus any balancing charges, less any balancing allowances on sale.

UK tax. The tax written down value of an industrial building prior to sale.

(RQE). UK tax. Quantities used in the calculation of industrial buildings tax adjustments on disposal.

The legal principle that where a person has benefited undeservedly at another's expense, that person may be required to restore any improper benefit that may have been attained.

A clause included in a contract, such as a contract of employment, to stop the parties working with competitors during the period of the agreement and for some time thereafter. However, unless carefully written the courts will see them as being in restraint of trade and ignore them.

A funds transfer system which handles a large volume of payments of relatively low value in such forms as cheques, credit transfers, direct debits, ATM and related transactions.

Lockboxes characterised by a large number of relatively small cash remittances, usually from consumers.

This term describes all payments which are not covered by the definition of large-value payments. Retail payments are mainly consumer payments of relatively low value and low urgency.

(RPI). Historically, RPI was the primary measure of consumer price inflation in the UK, calculated as the change from month to month in the prices of a standard basket of retail goods and services. Different goods and services are included in the RPI compared with the UK Consumer Price Index (CPI) and the method of calculation of the two indices is different. RPI remains an important component in the calculation of the Limited Price Indexation of UK pensions.

The final accounting profit (or loss) for the reporting period which is transferred to the profit and loss reserve in the balance sheet to be accumulated with prior periods’ profits and losses.

Law. A retention of title clause is a term in a contract of sale providing that ownership of the goods will not pass to the buyer until the buyer has paid the seller.
Also known as a Romalpa clause after the name of the legal case in which the validity of such clauses was first established in UK law.

The surplus of the amount received back from an investment, over the initial amount invested. To facilitate comparisons, return is usually expressed as a percentage of the initial amount invested, most commonly as an effective annual rate of return.

Returns can be negative. Negative returns mean that the amounts received back from an investment are less than the amounts initially invested.

The ratio of profit (usually before interest and tax) to total assets.

Same as Return on capital employed.

(ROCE). An accounting measure of management performance, calculated as the accounting profits ('return') divided by the total book value of the capital employed to earn the profits.

This measure needs care in its definition and application, because both the 'return' and the 'capital employed' inputs can be defined in different ways.

When ROCE is used in the calculation of Economic Value Added, its inputs are defined as:
Return = PBIT x (1 - Tax rate)
Capital Employed = Book value of Equity + Book value of Debt.

(ROI). A measure of how much return is received (or expected to be received) compared to the investment made. Definitions of return and investment may vary depending on the specific use to which the measure is put.

A special accounting reserve recording the gains, net of any related losses, on the revaluation of tangible fixed assets.

1. Accounting. The value of goods and services sold. Generally the first line in an income statement or profit and loss account and sometimes referred to as “the top line”. Some companies (or other reporting entities) with undiversified businesses use specialised terms for their revenue, for example “Rental Income”. Used in this sense, the term means the same as Sales or Turnover.

2. Government. “The Revenue”: tax collecting department.

3. Economics. Revenue is produced by demand satisfied by supply, resulting in an equilibrium quantity and price being set by the market.

Tax. Expenditure incurred in the course of trade that is treated as an allowable deduction in arriving at taxable profit.

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

Banking. A service that transmits to the issuing company a file of cheques presented for payment that the company matches to its register data for cheque fraud control. The company contacts the financial institution if any items are to be returned.

Letter of credit than can be amended or cancelled at any time without notice to or consent of the beneficiary.

A revolving loan.

(RCF). A facility which permits the borrower to draw down and repay amounts at the borrower's discretion for a specified period of time.
An RCF is similar in this respect to an overdraft.
However, RCFs are normally for much larger amounts than overdrafts, and RCFs - unlike overdrafts - are not usually repayable on demand.

A loan available for a set period - for example 5 years - but which is drawn down for shorter set periods, for example 3 or 6 months. The loan is repaid and re-borrowed at the end of each such short period.
Also known as a 'revolver'.

A rewarded risk is one which is associated with an expected benefit for the party accepting the risk. For example a greater net return (or a smaller net cost) for the party accepting the risk. So it may be rational - depending on the size and likelihood of the expected benefit - to accept a rewarded risk.

Request for Information.

Request for Proposal.

1. The rate of change of an option’s value with respect to changes in the risk-free rate of return. The first derivative of option value with respect to the risk-free rate of return.

2. A Greek letter sometimes used to designate the correlation coefficient between two variables.

1. Speculative activity which takes advantage of the current yield curve in order to increase the expected return on investments.
(At the risk of making losses if the current yield curve were to shift adversely.)

2. Similar speculative activity which takes advantage of the current yield curve in order to reduce the expected cost of borrowing.
(Again at the risk of adverse effects, if the current yield curve were to shift adversely.)

A process of issuing new equity shares where they are offered first to existing shareholders in proportion to their existing shareholding. Existing shareholders have, under UK law, pre-emption rights. This means that they generally have first refusal on the purchase of any new equity shares.

This means that prevailing market yields are higher for longer maturities. In this situation par yields are the lowest, zero coupon yields are higher than the par yields, and the forward yields are the highest of all.

1. In the Corporate Finance context, risk refers to the variability of potential future returns. It is often quantified as the standard deviation of returns and estimated by the standard deviation of historic returns.

2. In a more general sense, risk refers to the unknown (or unknowable) nature of future outcomes involving, for example, market prices or market rates.

3. The possibility of adverse effects resulting from changes in market prices or rates, or from changes in other general conditions in the market, or from other economic factors specific to the business (such as the failure of a key supplier).

4. The possibility of an event occurring that will have an impact on the achievement of objectives. This includes both the upside opportunity and the downside hazard which could either move you towards or drive you away from achieving your objectives. Risk is measured in terms of impact & likelihood. No business can eliminate all risk, so risk has to be managed effectively. This is best done through a risk-aware culture.

Risk appetite is broadly the amount of risk that an organisation is willing to accept in pursuit of value, improved financial performance or of other benefits, with management responsible for setting boundaries or parameters for risk taking. Any risk responses should be designed such that the 'net' (residual) risk after considering controls does not exceed these boundaries.

Risk management. The implementation of risk policy.

See Risk free rate of return.

The rate of return which can be earned on investments which are considered to be near-enough risk-free, for example, domestic central government debt in the UK or the US.

The analysis and management of the financial risks and other risks to which an organisation is exposed.
Risk management responses and techniques include - among others - hedging, avoiding or retaining the relevant risks.

Risk management should therefore be a consistent & systematic process to identify, analyse, evaluate, treat, monitor & communicate risk. Key elements include for example (but are not limited to) awareness training, risk registers, risks factored in for change in business and risk champions.

Risk mitigation is the use of techniques to reduce the likelihood or the potential size of adverse effects on the organisation. (But without avoiding or transferring the risk entirely.)
For example, requiring collateral from borrowers in order to mitigate credit risk.

Risk neutral valuation methods are ones which do not depend on knowing or assuming the attitudes to risk of market participants. Instead, they are based on no-arbitrage assumptions and constructing replicating portfolios of simpler instruments. More complex instruments and positions are then valued indirectly, by calculating the value of the replicating portfolio.

Risk management. Predetermined actions the entity will take, or have in reserve, to deal with the various situations that might arise. Risk policy should cover commercial as well as treasury approaches to exposure management. The Policy should identify and reflect the risk appetite and risk tolerances of the organisation, making explicit that a risk management system has been designed to provide reasonable assurance of achieving business objectives. It should assign accountability for managing risks and reporting results on effectiveness of the system to executive management.

Risk management. A table or other appropriate structure used to facilitate the description and assessment of risks. The use of a well designed structure is necessary to ensure a comprehensive assessment process. Strategy/objectives should also feature to identify function responsible for developing strategy and policy. By considering the consequence and probability of each of the risks, it should be possible to prioritise the key risks that need to be analysed in more detail.

Risk tolerance describes objective(s) for control of the risk and desired level of performance. If it is decided to take the risk, it is the extent to which an organisation is willing to accept identified risks, within boundaries which may be set by reference to the likelihood and size of potential adverse financial impact, or by reference to other criteria.

Risk management committee.

Abbreviation for the Regulatory News Service.

Abbreviation for Return On Capital Employed.

Return On Investment.

The renewal of a drawing under a revolving credit or the re-issue of outstanding short-term money market securities on their maturity date.

A UK tax relief enabling a trader to postpone payment of capital gains tax on the disposal of specified classes of asset by rolling over the gain into an asset also within one of the specified classes, which is acquired within one year before and three years after the date of disposal.

A Retention of title clause in a contract of sale.

A global organisation that is developing standards for the global supply chain.

In the UK, the Queen’s assent to making a Bill an Act of Parliament.

Abbreviation for Retail Price Index.

UK tax. Residue of Qualifying Expenditure.

Regional Treasury Centre.

Funds transfer. Abbreviation for Real Time Gross Settlement system.

Pensions. See Scheme Rules.

A measure of the return on a fixed income security. It is equal to the coupon divided by the price, expressed as a percentage.