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Financial Glossary

Idiosyncratic Risk

Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words, the risk that is firm specific and can be diversified through holding a portfolio of stocks.

Immediate settlement

Delivery and settlement of securities within five business days.

Immunization

The construction of an asset and a liability that are subject to offsetting changes in value.

Immunization strategy

A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a general change in the rate of interest through the use of duration.

Implied call

The right of the homeowner to prepay, or call, the mortgage at any time.

Implied repo rate

The rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date. Related: cheapest to deliver issue

Implied volatility

The expected volatility in a stock's return derived from its option price, maturity date, exercise price, and riskless rate of return, using an option-pricing model such as Black/Scholes.

Import-substitution development strategy

A development strategy followed by many Latin American countries and other LDCs that emphasized import substitution - accomplished through protectionism - as the route to economic growth.

Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for corporate taxes that the firm has paid.

Income beneficiary

One who receives income from a trust.

Income bond

A bond on which the payment of interest is contingent on sufficient earnings. These bonds are commonly used during the reorganization of a failed or failing business.

Income fund

A mutual fund providing for liberal current income from investments.

Income statement (statement of operations)

A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Income stock

Common stock with a high dividend yield and few profitable investment opportunities.

Incremental cash flows

Difference between the firm's cash flows with and without a project.

Incremental costs and benefits

Costs and benefits that would occur if a particular course of action were taken compared to those that would occur if that course of action were not taken.

Incremental internal rate of return

Internal rate of return (IRR) on the incremental investment from choosing a large project instead of a smaller project.

Indenture

Agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders.

Independent project

A project whose acceptance or rejection is independent of the acceptance or rejection of other projects.

Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index products and options. Related: Chicago Mercantile Exchange (CME).

Index arbitrage

An investment/trading strategy that exploits divergences between actual and theoretical futures prices.

Indexed bond

Bond whose payments are linked to an index, e.g. the consumer price index.

Index fund

Investment fund designed to match the returns on a stockmarket index.

Indexing

A passive instrument strategy consisting of the construction of a portfolio of stocks designed to track the total return performance of an index of stocks.

Index model

A model of stock returns using a market index such as the S&P 500 to represent common or systematic risk factors.

Index option

A call or put option based on a stock market index.

Index warrant

A stock index option issued by either a corporate or sovereign entity as part of a security offering, and guaranteed by an option clearing corporation.

Indicated dividend

Total amount of dividends that would be paid on a share of stock over the next 12 months if each dividend were the same amount as the most recent dividend. Usually represent by the letter ``e'' in stock tables.

Indicated yield

The yield, based on the most recent quarterly rate times four. To determine the yield, divide the annual dividend by the price of the stock. The resulting number is represented as a percentage. See: dividend yield.

Indifference curve

The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utilities according to g and s .

Indirect quote

For foreign exchange, the number of units of a foreign currency needed to buy one U.S.$.

Inductive reasoning

The attempt to use information about a specific situation to draw a conclusion.

Industrial revenue bond (IRB)

Bond issued by local government agencies on behalf of corporations.

Industry

The category describing a company's primary business activity. This category is usually determined by the largest portion of revenue.

Inflation

The rate at which the general level of prices for goods and services is rising.

Inflation-escalator clause

A clause in a contract providing for increases or decreases in inflation based on fluctuations in the cost of living, production costs, and so forth.

Inflation risk

Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

Inflation uncertainty

The fact that future inflation rates are not known. It is a possible contributing factor to the makeup of the term structure of interest rates.

Informational efficiency

The speed and accuracy with which prices reflect new information.

Information asymmetry

A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.

Information-content effect

The rise in the stock price following the dividend signal.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset. Related: search costs.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an investment strategy that only utilizes existing information.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent information not currently reflected in the stock's price.

Information services

Organizations that furnish investment and other types of information, such as information that helps a firm monitor its cash position.

In-house processing float

Refers to the time it takes the receiver of a check to process the payment and deposit it in a bank for collection.

Initial margin requirement

When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange.

Initial public offering (IPO)

A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting fees which represent a load to buyers.

Input-output tables

Tables that indicate how much each industry requires of the production of each other industry in order to produce each dollar of its own output.

Insider information

Relevant information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.

Insiders

These are directors and senior officers of a corporation -- in effect those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.

Insider trading

Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.

Insolvency risk

The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Insolvent

A firm that is unable to pay debts (liabilities are greater than assets).

Installment sale

The sale of an asset in exchange for a specified series of payments (the installments).

Institutional investors

Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Institutionalization

The gradual domination of financial markets by institutional investors, as opposed to individual investors. This process has occurred throughout the industrialized world.

Instruments

Financial securities, such as money market instruments or capital market instruments.

In-substance defeasance

Defeasance whereby debt is removed from the balance sheet but not cancelled.

Insurance principle

The law of averages. The average outcome for many independent trials of an experiment will approach the expected value of the experiment.

Insured bond

A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies.

Insured plans

Defined benefit pension plans that are guaranteed by life insurance products. Related: non-insured plans

Intangible asset

A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets.

Integer programming

Variant of linear programming whereby the solution values must be integers.

Intercompany loan

Loan made by one unit of a corporation to another unit of the same corporation.

Intercompany transaction

Transaction carried out between two units of the same corporation.

Interest

The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest coverage ratio

The ratio of the earnings before interest and taxes to the annual interest expense. This ratio measures a firm's ability to pay interest.

Interest coverage test

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's interest coverage would, as a result of the issue, fall below some specified minimum.

Interest equalization tax

Tax on foreign investment by residents of the U.S. which was abolished in 1974.

Interest expense

In a corporate setting, interest expense is the money the company or corporation pays out in interest on loans.

Interest on interest

Interest earned on reinvestment of each interest payment on money invested. See: compound interest.

Interest-only strip (IO)

A security based solely on the interest payments form a pool of mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop and the value of the IO falls to zero.

Interest payments

Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest rate

The monthly effective interest rate. For example, the periodic rate on a credit card with an 18% annual percentage rate is 1.5% per month.

Interest rate agreement

An agreement whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).

Interest rate cap

Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate.

Interest rate ceiling

Related: interest rate cap.

Interest rate floor

An interest rate agreement in which payments are made when the reference rate falls below the strike rate.

Interest rate on debt

The firm's cost of debt capital.

Interest rate parity theorem

Interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate.

Interest rate risk

The risk that a security's value changes due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates.

Interest rate swap

A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable.

Interest subsidy

A firm's deduction of the interest payments on its debt from its earnings before it calculates its tax bill under current tax law.

Interest tax shield

The reduction in income taxes that results from the tax-deductibility of interest payments.

Intermarket sector spread

The spread between the interest rate offered in two sectors of the bond market for issues of the same maturity.

Intermarket spread swaps

An exchange of one bond for another based on the manager's projection of a realignment of spreads between sectors of the bond market.

Intermediate-term

Typically 1-10 years.

Intermediation

Investment through a financial institution. Related: disintermediation.

Internal finance

Finance generated within a firm by retained earnings and depreciation.

Internal growth rate

Maximum rate a firm can expand without outside source of funding. Growth generated by cash flows retained by company.

Internally efficient market

Operationally efficient market.

Internal market

The mechanisms for issuing and trading securities within a nation, including its domestic market and foreign market. Compare: external market.

Internal measure

The number of days that a firm can finance operations without additional cash income.

Internal rate of return

Dollar-weighted rate of return. Discount rate at which net present value (NPV) investment is zero. The rate at which a bond's future cash flows, discounted back to today, equals its price.

International Bank for Reconstruction and Development - IBRD or World Bank

International Bank for Reconstruction and Development makes loans at nearly conventional terms to countries for projects of high economic priority.

International Banking Facility (IBF)

International Banking Facility. A branch that an American bank establishes in the United States to do Eurocurrency business.

International bonds

A collective term that refers to global bonds, Eurobonds, and foreign bonds.

International Depository Receipt (IDR)

A receipt issued by a bank as evidence of ownership of one or more shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR structure is that the corporation does not have to comply with all the regulatory issuing requirements of the foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depository Receipt (ADR).

International diversification

The attempt to reduce risk by investing in the more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns.

International finance subsidiary

A subsidiary incorporated in the U.S., usually in Delaware, whose sole purpose was to issue debentures overseas and invest the proceeds in foreign operations, with the interest paid to foreign bondholders not subject to U.S. withholding tax. The elimination of the corporate withholding tax has ended the need for this type of subsidiary.

International Fisher effect

States that the interest rate differential between two countries should be an unbiased predictor of the future change in the spot rate.

International fund

A mutual fund that can invest only outside the United States.

International market

Related: See external market.

International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of member countries and to lend foreign currency reserves to members with short-term balance of payment problems.

International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial futures. Related: Chicago Mercantile Exchange (CME).

In the box

This means that a dealer has a wire receipt for securities indicating that effective delivery on them has been made.

In-the-money

A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money by $0.50 an ounce. Related: put.

Intramarket sector spread

The spread between two issues of the same maturity within a market sector. For instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility corporate bonds.

Intrinsic value of a firm

The present value of a firm's expected future net cash flows discounted by the required rate of return.

Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-the-money has no intrinsic value. Related: in-the-money.

Inventory

For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by (First-in-first-out) FIFO, (Last-in-first-out) LIFO or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets. For security firms: securities bought and held by a broker or dealer for resale.

Inventory loan

A secured short-term loan to purchase inventory. The three basic forms are a blanket inventory lien, a trust receipt, and field warehousing financing.

Inventory turnover

The ratio of annual sales to average inventory which measures the speed that inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.

Inverse floating rate note

A variable rate security whose coupon rate increases as a benchmark interest rate declines.

Inverted market

A futures market in which the nearer months are selling at price premiums to the more distant months. Related: premium.

Investment analysts

Related: financial analysts

Investment bank

Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. Underwriters.

Investment decisions

Decisions concerning the asset side of a firm's balance sheet, such as the decision to offer a new product.

Investment grade bonds

A bond that is assigned a rating in the top four categories by commercial credit rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys' classifies investment grade bonds as Ba or higher. Related:High-yield bond.

Investment income

The revenue from a portfolio of invested assets.

Investment management

Also called portfolio management and money management, the process of managing money.

Investment manager

Also called a portfolio manager and money manager, the individual who manages a portfolio of investments.

Investment product line (IPML)

The line of required returns for investment projects as a function of beta (nondiversifiable risk).

Investments

As a discipline, the study of financial securities, such as stocks and bonds, from the investor's viewpoint. This area deals with the firm's financing decision, but from the other side of the transaction.

Investment tax credit

Proportion of new capital investment that can be used to reduce a company's tax bill (abolished in 1986).

Investment trust

A closed-end fund regulated by the Investment Company Act of 1940. These funds have a fixed number of shares which are traded on the secondary markets similarly to corporate stocks. The market price may exceed the net asset value per share, in which case it is considered at a ``premium.'' When the market price falls below the (NAV)/share, it is at a ``discount.'' Many closed-end funds are of a specialized nature, with the portfolio representing a particular industry, country, etc. These funds are usually listed on US and foreign exchanges.

Investment value

Related:straight value.

Investor

The owner of a financial asset.

Investor fallout

In the mortgage pipeline, risk that occurs when the originator commits loan terms to the borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.

Investor relations

The process by which the corporation communicates with its investors.

Investor's equity

The balance of a margin account. Related: buying on margin, initial margin requirement.

Invoice

Bill written by a seller of goods or services and submitted to the purchaser.

Invoice billing

Billing system in which the invoices are sent off at the time of customer orders are all separate bills to be paid.

Invoice date

Usually the date when goods are shipped. Payment dates are set relative to the invoice date.

Invoice price

The price that the buyer of a futures contract must pay the seller when a Treasury Bond is delivered.

Involuntary liquidation preference

A premium that must be paid to preferred or preference stockholders if the issuer of the stock is forced into involuntary liquidation.

IRA/Keogh accounts

Special accounts where you can save and invest, and the taxes are deferred until money is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of contributions. Withdrawals of tax deferred contributions are taxed as income, including the capital gains from such accounts.

Irrational call option

The implied call imbedded in the MBS. Identified as irrational because the call is sometimes not exercised when it is in the money (interest rates are below the threshold to refinance). Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

Irrelevance result

The Modigliani and Miller theorem that a firm's capital structure is irrelevant to the firm's value.

ISDA

International Swap Dealers Association. Formed in 1985 to promote uniform practices in the writing, trading, and settlement of swaps and other derivatives.

ISMA

International Security Market Association. ISMA is a Swiss law association located in Zurich that regroups all the participants on the Eurobond primary and secondary markets. Establishes uniform trading procedures in the international bond markets.

Issue

A particular financial asset.

Issued share capital

Total amount of shares that are in issue. Related:outstanding shares.

Issuer

An entity that issues a financial asset.