dr p.sravan kumar mba,phd ipo glossary...dr p.sravan kumar mba,phd 3 guest user - a person who is...

Dr P.Sravan Kumar MBA,PhD

1

IPO Glossary

Allotment - Allotment is the distribution of shares to the public during an offer. The

normal rule of allocation is to allocate the shares in the event of oversubscription on

a proportionate basis. This however excludes the firm allotment portion.

Auditor - An auditor is an individual who conducts an examination and verification of a company's financial and accounting records and supporting documents.

Annual General Meeting (AGM) - The shareholders meeting, usually held at the

end of each financial year, to discuss the previous performance and future outlook.

Authorised Capital - The maximum equity capital a company can raise, which is

mentioned in the Memorandum of Association and Articles of Association of the

Company. However, share premium is excluded from the definition of authorized

capital.

Book Building - In a book building offer, the syndicate members decide the price

range and the people decide the price of the issue based on a tender method.

Bankers to the issue - Bankers to the issue are entities that are registered by SEBI

and act as issue and collecting centres for IPO forms and cheques.

Brokers - Companies making public issues appoint brokers to procure subscription.

The managers to the issue distribute prospectuses and application forms to the

brokers. These brokers form a very important link in the distribution value chain of

financial products.

Brokerage - It is the commission paid to the brokers for the purchase and sale of

shares.

Bonus Issues - They are the shares issued to capitalize on the reserves and surplus

of the company without charging the shareholders. From the accounting perspective

it involves a debit to the free reserves and a credit to the share capital.

Bridge Loan - A Bridge Loan is a loan that is used for a short duration of time until

permanent financing is put in place. Companies that come out with an IPO issue

access bridge finance for the interim period before the issue proceeds are actually

realized.

Conditional Offer - An offer to purchase securities depending on the effectiveness

of a registration statement and the pricing of an IPO.

Dematerialisation - Dematerialisation or "Demat" is a process of converting the

physical securities into electronic form and stored in computers by a Depository.

Securities present in the physical form are surrendered to the respective company

which will then nullify them and credit the depository account.

Direct Public Offerings - Offering of securities to the public directly by an issuer

without the assistance of any Investment Banking firm.

http://www.karvy.com/ipo/glossary.htm


2

Draft Prospectus - A draft prospectus provides the information on the financials of

the company, promoters, background, tentative issue price etc. It is filed by the Lead

managers to SEBI to provide issue details. Overview of the draft prospectus can be

seen on www.sebi.gov.in (SEBI’s web site). The final prospectus is printed after

obtaining the clearance from SEBI and Registrar of Companies (ROC).

Bought Out Deals - A bought out deal is a process by which an investor (usually

the investment banker) buys out a significant portion of the equity of an unlisted

company with a view to make it public within an agreed time frame.

Private Placement - A type of offering, exempted from registration that allows the

issuing company to avoid registration requirements and save underwriting fees by

offering company shares directly to institutional and accredited investors.

Rights Issues - If a company wants to increase its subscribed capital by allotment

of further shares after 1 or 2 years of first allotment, it has to offer to the existing

shareholders first in proportion to the capital paid up on the shares held by them.

American depository Receipt (ADR) - They are negotiable certificates that

represent a certain number of shares of a foreign stock traded on a US exchange and

held by a US bank.

Global Depository Receipt (GDR) - They are negotiable certificates held by a bank

of one country that represent a certain number of shares of a foreign stock traded on

another exchange, usually a European exchange. The accounting requirements for

GDRs are not as stringent as that for ADRs.

Firm Allotment - Out of the total amount the company proposes to raise in the

market, some portion is fixed to the promoters in order to avoid diluting their stake

in the company. This is called Firm Allotment.

Filing - A copy of prospectus having attached to the documents required to be

submitted to the Registrar of Companies (ROC).

Flipping - The practice of subscribing to a new security offer and quickly selling it in

the after-market.

Extraordinary General Meeting (EGM) - The meeting which is not an annual

general meeting. This can be conducted by any point of time whenever the company

needs to take some crucial decisions.

Secondary Offering - The sale of newly issued securities by an issuer which already

has publicly traded securities.

Issued capital - The capital proposed by the company to be raised from the

market. Out of the issued capital the shares for which both application and allotment

monies are paid in full represents the paid-up capital.

http://www.sebi.gov.in/


3

Guest User - A person who is not a trading member (and hence cannot subscribe a

new issue) but is eligible to view listings and prospectus of new issues.

IPO - Initial Public Offer (IPO) is a source of collecting money from the public for the

first time in the market to fund for its projects. In return, the company gives the

share to the investors in the company

Investment Banking Firm - A financial entity acting as an underwriter or agent,

and serves as an intermediary between an issuer of securities and the investing

public. Investment bankers perform various services: financing, facilitating mergers,

corporate restructuring activities, broking and trading on their own accounts.

Issuer - An entity, like a company, municipality or government, that has the power

to issue and distribute securities.

Impersonation - A person who

a) uses fictitious names for acquiring or subscribing shares

b) induces the company to allot or register any transfer of shares to

him or any other person in a fictitious name

Joint Applications - Applications can be filled in single or in joint names (more than

one person). In joint application, all payments will be made in favor of the first

applicant.

Listing - The process of making the securities officially quoted on the notified stock

exchange for the trade.

Multiple Applications - Two or more applications submitted on a single name are

considered as multiple applications.(An applicant is supposed to submit only one

application irrespective of the number of shares applied for.) The applications

submitted for both electronic and physical equity shares are considered as multiple

applications.

Minimum Subscription - The minimum shares the company needs to get from the

public out of the total issue by the date of closure. (Presently every company need to

raise 90% of the issued amount). Else, the company shall refund the whole amount

received. This 90 % has to be exclusive of the cheques that are not cleared.

Oversubscription - Any extra amount received by the company more than the

proposed issued capital.

Lead Managers - The lead manager is appointed by the company which desires to

raise capital from the market. The lead manager performs the following activities:

Designing the instrument Pricing the issue Timing the issue Marketing Preparing the offer document Listing


4

Allotment/Refund

Merchant Bankers - Merchant Bankers facilitate the issue process.

Role of Merchant Banker:

• Directing and co-ordinating the activities with under writers, registrars and bankers.

• Assuring the investors of the soundness of the issue

• Promising companies/entrepreneurs/promoters to tap resources, Complying with SEBI guidelines.

National Securities Depository Limited (NSDL) - This is an organization, which

is an intermediary between the Registrar and the company for dematerialisation of

shares.

Net Offer - The rest of the issued capital after allotting to promoters, which would

be raised from the public is called Net Offer.

Paid Up capital - The part of the issued capital of a company that has been paid up

by the shareholders

Preferential Shares - These are the shares issued at a fixed coupon rate to

investors which entails the foregoing of the right to participate in the management.

Profit Earning (P\E) ratio - P/E is the ratio of a company's share price to earnings

per-share. It essentially shows the amount that an investor is willing to pay for every

one rupee earned by the company.

Prospectus - The official offer document included in the registration statement filed

with SEBI in conjunction with a public offer. The prospectus contains information

about the offer of securities and should be given to the original purchasers no later

than the written confirmation of their purchase.

Road Show - The process by which underwriters acquaint potential institutional

investors with the products, people and finances of a company planning to go public.

Generally, this presentation is a face-to-face meeting. However they are emerging

on online and video presentations.

Registration Statement - A document that must be filed with SEBI before

securities can be sold to the public. It describes the business of the issuer of the

securities, how the proceeds of the offering will be used, audited financial

statements, some background on the principal executives, and other pertinent data.

External Risk Factors - The external factors that influence the company’s

performance vis-a-vis share performance, which has to be spelt out by the company

in the offer document. These are usually factors like changes in macroeconomic

variables which are outside the control of the company.


5

Internal Risk Factors - The internal factors that influence the company’s

performance vis-a-vis share performance, which has to be spelt out by the company

in the offer document. These are usually factors pertaining to the company’s internal

operations and management which are within the control of the company.

Management Perception of Risk Factors - The management’s comment on the

possible impact of the risk factors and a statement of how the company is prepared

to tackle and overcome these risk factors.

Rights Issue - In order to avoid dilution of stake of existing shareholders, company

issues "rights" shares in proportion to their current holding. This is done when the

company plans to tap the market after their IPO.

Registrar - They play an administrative role in conducting a public issue. They are

responsible for collecting information from the collecting banks and report to the

companies and lead managers about the issue collections. They advise the company

regarding the closure or extension of closing date of the issue.

Stock Option - The right to buy a stock at a specified price at a specified time in the

future. Stock options are usually given to senior managers and executives as an

incentive to continue with the company.

Underwriter - An investment banking firm which enters into a contract with the

issuer of new securities to distribute them to the investing public.

Underwriting Commission - The commission paid to the underwriter for bearing

the risk of an issue.

Venture Capital - An important source of financing used to fund start-up companies

that do not have access to capital markets. Venture Capital typically entails

significant investment risk but offers the potential for above-average future returns.

Mutual Fund Glossary

Active Portfolio Management - Is a systematic and proactive approach to investment with the goal of beating the market. This strategy is based on the premise that markets are not efficient and that there is scope to earn abnormal profits through an active investment strategy.

Annualized Return - The return a fund would have generated over a year on a compounded basis. This method is the best indicator to measure the performance of a fund.

Asset Management Company (AMC)

A Company registered with SEBI, which takes investment/ divestment decisions for the mutual fund, and manages the assets of the mutual fund. e.g. for Sun F&C mutual fund , the AMC is Sun F&C Asset Management (India) Pvt. Ltd. TOP

Asset Allocation

http://www.karvy.com/mfd/glossary.htmhttp://www.karvy.com/mfd/glossary.htm#TOP#TOP


6

It is the process of allocating the overall corpus to different assets like equities, bonds, real estate, derivatives etc. TOP

Back-end Load

A kind of redemption charge that an investor has to pay for withdrawing his money from the mutual fund. It is basically imposed to discourage investors from exiting the fund. It is also popularly referred to as an Exit Load. TOP

Balanced fund

A fund that invests substantially both in debt and equity. TOP

Bottom-up Investing

It is a strategy of selecting the company for investment first and then cross checking it by evaluating factors pertaining to the industry and the economy. It is the opposite of the top-down approach to investing. TOP

Closed-ended fund

A fund where investors have to commit their money for a particular period. In India these closed-ended funds have to necessarily be listed on recognized a stock exchange which provides an exit route. TOP

Contingent deferred sales charge (CDSC)

An exit charge permitted under the regulations for a no-load scheme TOP

Continuous Offer Period

Is the date from which the units are available for sale and repurchase at a price linked to NAV of the scheme. TOP

Corpus

The total investable funds available with a mutual fund scheme at any point of time. TOP

Credit Risk

It is the risk that the issuer of a fixed income security may default on payment of interest and repayment of principal. It is also referred to as default risk. TOP

Dated Security

http://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOP


7

A debt instrument that is long term in nature and has a fixed date of redemption. TOP

Debt fund

A fund that invests in debt securities like Government securities, Treasury Bills, corporate Bonds etc. These funds are generally preferred by investors wanting steady income and not willing to take higher risks. TOP

Dematerialization

The process of converting the physical /paper shares in Electronic form. SEBI had made it compulsory to get the shares of some companies dematerialized. In this process the investor opens an account with a Depository Participant (DP) and the number of shares the investor holds is shown in this account. TOP

Depository Participant

An authorized body who is involved in dematerialization of shares and maintaining of the investors accounts. TOP

Discount/Premium to (Net Asset Value) NAV

It is the difference between the unit price and NAV. If the price is higher than the NAV, the units are trading at premium: if the price is lower, the units are trading at a discount. TOP

Diversification

It is the investment strategy of not putting all one’s eggs in one basket. By diversifying a portfolio across different industries, overall risk of the portfolio is reduced. TOP

Dollar Cost Averaging

The strategy of dividing the investible amount into a number of equal parts and buying at regular intervals to take advantage of lower prices. This strategy is more beneficial in a bear phase. TOP

Efficient Portfolio

A portfolio which ensures maximum return for a given level of risk or a minimum level of risk for an expected return. TOP

Factor Fund

http://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOP


8

It is a mutual fund that has a core philosophy of investing in a particular factor or style in the market. They are also referred to as Style Funds. Examples of factor funds are Mid-cap funds, Low P/E funds, Growth funds etc. TOP

Financial Pyramid

An investment plan in the shape of a pyramid structure where the safest investments are at the base and the riskiest investments at the peak. TOP

Fixed Income Security

A type of security that pays fixed interest at regular intervals. These comprise gilt-edged securities, bonds (taxable and tax-free), preference shares and debentures. Less risky than equity shares and have little scope for capital appreciation. TOP

Front-End Load

An initial amount charged by a fund for its administrative expenses or for paying commissions to brokers. If the charge is made at the termination or redemption, it becomes a back-end load. TOP

Gilt-edged Security

Government securities and bonds, usually with a low interest rate. Considered safest investments, as the government security is free from default risk. Originally such certificates were edged with gold and hence the name. TOP

Gilt fund

Funds that invest predominantly in government securities and treasury bills. It is good for investors who desire safety of principal and adequate liquidity. TOP

Go-Go Fund

A mutual fund which invests in highly risky but potentially profitable investments. Such a fund usually has a short life. TOP

Equity/Growth fund

A fund that invest primarily in equities and has capital appreciation as its investment objective

Fund Manager



9

A professional manager appointed by the Asset Management Company to invest money in accordance with the objects of the scheme.

Fundamental Analysis

A method of investment analysis based on the fundamentals like turnover, net profit, growth, and vision of a company. The boom or depression of the stock markets are not considered in this analysis.

Income Fund

A fund that usually invests in debentures, bonds, and high dividend shares. Preferred by investors who wants regular income. It pays dividends to the investors out of its earnings.

Index Fund

A fund whose portfolio is benchmarked against a popular index like the BSE Sensex or the BSE Natex. Such an investment philosophy reflects the belief that the market is efficient and trying to beat the market over the long term is futile

Initial Offer Period

The dates on which the initial subscription to the units of the scheme can be made. It is similar to the IPO of an equity issue. This initial offer period is followed by a continuous offer period.

Interest Rate Risk

The change in the price of a debt security due to changes in the market interest rates is the interest rate risk. For debt oriented mutual fund schemes, this interest rate risk affects the NAV of the fund. A rise in the interest rates leads to a fall in the price of a fixed income security.

Interim Dividend

An advance installment of the dividend finally declared. More often one, but sometimes two such payments are made. The final dividend is often at least equal, and sometimes more. The interim dividend is a fair indication of a company's profitability, during the working year.

Liquid Fund

http://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOP


10

A fund that invests its corpus in short term instruments like call markets, treasury bills, Commercial Paper (CP), Certificate of Deposit (CD).

Liquidity Risk

It is the risk in a fixed income security as well as in equities that these securities may not be sold in the market at close to their value. Liquidity risk is characteristic of narrow markets like India.

Load

A charge by the fund when an investor buys (entry load) or sells (exit load) units in the fund.

Market Capitalization

Represents the market value of the company. It is a product of the current market price and the number of shares outstanding.

Market Instrument

A fully negotiable instrument for short-term debt.

Market Lot

A fixed minimum number of shares, in which or in multiples of which, shares are bought and sold on the stock exchange. The advent of dematerialization of shares will do away the significance of market lot.

Net Asset Value (NAV)

This is calculated as total assets minus all expenses and divided by the number of outstanding units. This is the main performance indicator for a mutual fund, especially when viewed in terms of appreciation over time.

No-Load Fund

Shares of an open-ended fund, which can be bought directly from the fund without any sales charge or brokerage. US-64 is an example of a no-load fund.

Offer Price

The price at which units can be bought from a fund.

http://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOP


11

Offshore Fund

A fund domiciled outside the country where investments are made. It is often a tax haven, not subject to the tax laws of the holder's country.

Pari Passu

Ranking equally. After conversion of debentures into shares, the new shares created carry the same rights as the existing shares of the company to receive dividends, rights and bonus shares, and to participate in the company's profit and loss.

Passive portfolio management

Exactly the reverse of active portfolio management. The portfolio manager assumes that markets are efficient and all information is already analyzed and reflected in the prices of shares. This strategy is based on the premise that it is impossible to consistently beat the market.

Rating

Evaluation of credit risk in fixed income securities. This evaluation is specific to the security rated and is done in India by Crisil, Icra, Care and Duff & Phelps.

Record Date

It is the date announced by the company/mutual fund, which is a cut-off date for corporate benefits like dividends, rights, bonus etc. Only investors whose names appear in the company’s registers on that date are eligible for the said benefits.

Reinvestment Plan

It is a plan where the earnings of a mutual fund scheme are reinvested back in the fund.

Reinvestment Risk

It is the risk that the interest on fixed income instruments cannot be reinvested at the same rate. This problem becomes pronounced in a falling interest rate scenario.

Sector fund

Such funds invest only in stocks belonging to a specific industry usually aimed at growth. For e.g. Kothari Pioneer Infotech Fund. Sector funds are generally considered to be risky in nature.



12

Securities

Financial documents which give the owner specific rights of ownership; these include: equity and preference shares, debentures, treasury bills, government bonds, units of mutual fund, and any other marketable documents.

Sinking Fund

Money regularly set aside in a separate fund and invested by a company for the repayment of debt instruments (fixed deposits, debentures, other loans) or the redemption of preference shares, or for replacement of assets.

Sponsor

Sponsor is the parent organization that contributes the initial capital of the asset management company (AMC). e.g. Kotak Mahindra Finance is the sponsor for Kotak Mahindra Mutual Fund.

Switching

Transferring from one scheme to another in a group of schemes operated by a Mutual Fund, where the rules so permit. A switching fee may or may not be charged.

SWOT Analysis

A type of fundamental analysis of the health of a company by examining its strengths(S), weakness (W), business opportunity (O), and any threat (T) or dangers it might be exposed to.

Systematic Risk

This is the market risk that a security faces and is essentially non-diversifiable in nature. This risk is caused by macro level factors like changes in inflation, interest rates, budget announcements etc.

Tax saving fund

Such funds allow the income tax payees to claim a rebate under the Income Tax Act.

Technical Analysis



13

A method of prediction of share price movements based on a study of price graphs or charts on the assumption that share price trends are repetitive. Since investor psychology follows a certain pattern, what is seen to have happened before is likely to be repeated. The technical analyst is not concerned with the fundamental strength or weakness of a company or an industry; he only studies price and volume behavior.

-Down Investment

An approach to stock selection which evaluates the prospects of the economy first, then the prospects of the industry and then finally the prospects of a particular company to take an investment decision. It is the opposite of a bottom-up approach to investing.

Transfer Agents

Professional firms, now mostly computerized, which maintain the records of shareholders of their client companies.

Treasury Bills

These are bills of exchange, i.e., IOUs, issued by the Reserve Bank of India for short-term loans, 91 days to 364 days.

Trustee

The trustee is the legal owner of the mutual fund. The trustee takes into custody or under its control all the capital and property of every scheme of the mutual fund and holds it in trust for the unit holders of the scheme.

Unsystematic Risk

This is the proportion of risk that is specific to a particular company. This diversifiable risk could arise due to company specific factors like operational factors, financial factors, labor unrest etc.

Value Investment

Investment in shares whose intrinsic value is above their market price. Fundamental analysts often make recommendations of value investment, as they can spot undervalued shares.

Vulture Fund



14

It is a fund that takes over the non-performing assets of bank or financial institution at a discount and issues pass-through units to the investors.

Venture Capital Fund

A limited company formed to provide venture or risk capital to new industries.

Zero Coupon Bond

A coupon is an interest warrant attached to a debt instrument, and the coupon rate is the rate of interest. A zero-coupon bond carries no interest, but is sold at a discount to its face value, which is the maturity value. The difference between the discounted price and the maturity value represents the interest on the bond.

Derivatives Glossary

American-Style Option

An option contract that may be exercised at any time between the date of purchase

and the expiration date. Most exchange-traded options in the United States are

American-style.

Arbitrage

The simultaneous purchase and sale of identical or equivalent financial instruments

or commodity futures in order to benefit from a discrepancy in their price

relationship.

Assignment

The receipt of an exercise notice by an option writer (seller) that obligates him to sell

(in the case of a call) or purchase (in the case of a put) the underlying security at

the specified strike price.

At-The-Money

http://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/mfd/glossary.htm#TOP#TOPhttp://www.karvy.com/drvtives/glossary.htm


15

An option is at-the-money if the strike price of the option is equal to the market price

of the underlying security.

Back Months

The futures or options on futures months being traded that are furthest from

expiration. Bear One who believes prices will move lower.

Call

An Option contract that gives the holder the right to buy the underlying security at a

specified price for a certain, fixed period of time.

Bear Market

A market in which prices are declining.

Bid

The price that the market participants are willing to pay

Bull

One who expects prices to rise.

Bull Market

A market in which prices are rising.

Buy On Close

To buy at the end of a trading session at a price within the closing range.

Buy On Opening

To buy at the beginning of a trading session at a price within the opening range.

Capped-Style Option

A capped option is an option with an established profit cap. The cap price is equal to

the option's strike price plus a cap interval for a call option or the strike price minus

a cap interval for a put option. A capped option is automatically exercised when the

underlying security closes at or above (for a call) or at or below (for a put) the

Option's cap price.

Class Of Options

http://www.karvy.com/drvtives/glossary.htm#top#top


16

Option contracts of the same type (call or put) and Style (American, European or

Capped) that cover the same underlying security.

Close

The period at the end of the trading session. Sometimes used to refer to the Closing

Range (or Range)

The high and low prices, or bids and offers, recorded during the period designated as

the official close

Closing Purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short

position in a given series of options.

Closing Sale

A transaction in which the seller's intention is to reduce or eliminate a long position

in a given series of options

Commission (or Round Turn)

The one-time fee charged by a broker to a customer when a futures or options on

futures position is liquidated either by offset or delivery.

Contract

Unit of trading for a financial or commodity future. Also, actual bilateral agreement

between the parties (buyer and seller) of a futures or options on futures transaction

as defined by an exchange.

Contract Month

The month in which futures contracts may be satisfied by making or accepting

delivery.

Covered Call Option Writing

A strategy in which one sells call options while simultaneously owning an equivalent

position in the underlying security or strategy in which one sells put options and

simultaneously is short an equivalent position in the underlying security.

Day Order

An order that is placed for execution during only one trading session. If the order

cannot be executed that day, it is automatically cancelled.



17

Day Trading

Establishing and liquidating the same position or positions within one day's trading.

The day is ended with no established position in the market.

Deferred

Another term for "back months." Delivery The tender and receipt of an actual

commodity or financial instrument, or cash in settlement of a futures contract.

Derivative Security

A financial security whose value is determined in part from the value and

characteristics of another security. The other security is referred to as the underlying

security.

Equity Options

Options on shares of an individual common stock.

European-Style Options

An option contract that may be exercised only during a specified period of time just

prior to its expiration.

Exercise

To implement the right under which the holder of an option is entitled to buy (in the

case of a call) or sell (in the case of a put) the underlying security.

Exercise settlement amount

The difference between the exercise price of the option and the exercise settlement

value of the index on the day an exercise notice is tendered, multiplied by the index

multiplier.

Expiration Cycle

An expiration cycle relates to the dates on which options on a particular underlying

security expire. A given option, will be assigned to one of three cycles, the January

cycle, the February cycle or the March cycle. LEAPS are not included in this cycle.

Expiration Date

Date on which an option and the right to exercise it, cease to exist.

Expiration Time

The time of day by which all exercise notices must be received on the expiration

date.


18

Floor Broker

An exchange member who is paid a fee for executing orders for Clearing Members or

their customers. A Floor Broker executing orders must be licensed by the exchange

he is working on.

Floor Trader

An exchange member who generally trades only for his/her own account or for an

account controlled by him/her. Also referred to as a "local."

Futures

A term used to designate all contracts covering the purchase and sale of financial

instruments or physical commodities for future delivery on a commodity futures

exchange.

Futures Commission Merchant

A firm or person engaged in soliciting or accepting and handling orders for the

purchase or sale of futures contracts, subject to the rules of a futures exchange and,

who, in connection with solicitation or acceptance of orders, accepts any money or

securities to margin any resulting trades or contracts. The FCM must be licensed by

the CFTC.

Hedge

A conservative strategy used to limit investment loss by effecting a transaction which

offsets an existing position.

Holder

The party who purchased an option. Initial Performance Bond The funds required

when a futures position (or a short options on futures position) is opened.

Sometimes referred to as Initial Margin)

In-the-money

A call option is in-the-money if the strike price is less than the market price of the

underlying security. A put option is in-the-money if the strike price is greater than

the market price of the underlying security.

Intrinsic Value

The amount by which an option is in-the-money.

LEAPS



19

Long-Term Equity Anticipation Securities are long-term stock or index options. LEAPS

are available in two types, calls and puts. They have expiration dates up to three

years in the future.

Limit Order

An order given to a broker by a customer that specifies a price; the order can be

executed only if the market reaches or betters that price.

Liquidation

Any transaction that offsets or closes out a long or short futures or options position.

Long Hedge (futures)

The purchase of a futures contract in anticipation of an actual purchase in the cash

market. Used by processors or exporters as protection against and advance in the

cash price

Long Position

An investors position where the number of contracts bought exceeds the number of

contracts sold. He is a net holder.

Maintenance Performance Bond (Previously referred to a Maintenance

Margin)

A sum, usually smaller than, but part of, the initial performance bond, which must be

maintained on deposit in the customer's account at all times. If a customer's equity

in any futures position drops to, or under, the maintenance performance bond level,

a "performance bond call" is issued for the amount of money required to restore the

customer's equity in the account to the initial margin level.

Margin Requirement for Options

The amount an uncovered (naked) option writer is required to deposit and maintain

to cover a position. The margin requirement is calculated daily.

Mark-To-Market

The daily adjustment of margin accounts to reflect profits and losses.

Market Order

An order for immediate execution given to a broker to buy or sell at the best

obtainable price.

Maximum Price Fluctuation (futures)



20

The maximum amount the contract price can change, up or down, during one trading

session, as stipulated by Exchange rules.

Minimum Price Fluctuation

Smallest increment of price movement possible in trading a given contract, more

commonly referred to as a "tick."

Nearby

The nearest active trading month of a futures or options on futures contract. It is

also referred to as "lead month."

Offer

The price at which an investor is willing to sell a futures or options contract. Offset

buying if one has sold, or selling if one has bought, a futures or options on futures

contract.

Open Interest

Total number of futures or options on futures contracts that have not yet been offset

or fulfilled by delivery. An indicator of the depth or liquidity of a market (the ability

to buy or sell at or near a given price) and of the use of a market for risk- and/or

asset-management.

Open Order

An order to a broker that is good until it is canceled or executed.

Opening Purchase

A transaction in which the purchaser's intention is to create or increase a long

position in a given series of options.

Opening Sale

A transaction in which the seller's intention is to create or increase a short position in

a given series of options.

Open interest

The number of outstanding option contracts in the exchange market or in a particular

class or series.

Out-Of-The-Money



21

A call option is out-of-the-money if the strike price is greater than the market price

of the underlying security. A put option is out-of-the-money if the strike price is less

than the market price of the underlying security.

Out-Trades

A situation that results when there is some confusion or error on a trade. A

difference in pricing, with both traders thinking they were buying, for example, is a

reason why an out-trade may occur.

Performance Bond Call

Previously referred to as Margin Call. A demand for additional funds because of

adverse price movement.

Premium (options)

An options price has two components. They are the intrinsic value and time value.

Premium is often referred to as time value. In the money call option - option strike

65. Underlying security is 67. Option price is 3. This is two points of intrinsic value

and 1 point of premium. An out of the money call where the strike price is 65 and

the underlying security is at 63 and the price of the option is 1-1/2. The premium

would be 1-1/2. As there is no intrinsic value.

Premium (futures)

The excess of one futures contract price over that of another, or over the cash

market price. Or, The amount agreed upon between the purchaser and seller for the

purchase or sale of a futures option. Remember that purchasers pay the premium

and sellers (writers) receive the premium.

Put

An option contract that gives the holder the right to sell the underlying security at a

specified price for a fixed period of time.

Rally Reaction

A decline in prices following an advance. The opposite of rally. An upward movement

of prices following a decline; the opposite of a reaction.

Registered Representative

A person employed by, and soliciting business for, a commission house or a broker

dealer. Many times referred to as a broker.

Round-Turn (futures)



22

Procedure by which a long or short position is offset by an opposite transaction or by

accepting or making delivery of the actual financial instrument or physical

commodity.

Scalp

To trade for small gains. Scalping normally involves establishing and liquidating a

position quickly, usually within the same day, hour or even just a few minutes.

Secondary Market

A market that provides for the purchase or sale of previously sold or bought options

through closing transactions. Stock exchanges and the Over The Counter market are

examples of the secondary market.

Series

All option contracts of the same class that also have the same unit of trade,

expiration date and strike price.

Settlement Price (futures)

A figure determined by the closing range that is used to calculate gains and losses in

futures market accounts. Settlement prices are used to determine gains, losses,

margin calls, and invoice prices for deliveries.

Short Hedge

The sale of a futures contract in anticipation of a later cash market sale. Used to

eliminate or lessen the possible decline in value of ownership of an approximately

equal amount of the cash financial instrument or physical commodity.

Short Position

An investor’s position where the number of contracts sold exceeds the number of

contracts bought. The person is a net seller.

Stop Order (Stop)

An order to buy or sell at the market when and if a specified price is reached.

Strike price

The stated price per share for which the underlying security may be purchased in the

case of a call, or sold in the case of a put, by the option holder upon exercise of the

option contract.

Time value



23

The portion of the option premium that is attributable to the amount of time

remaining until the expiration of the option contract. Time value is whatever value

the option has in addition to its intrinsic value. This is often referred to as premium.

Type

Describes either a put or call.

Uncovered call writing

A short call option position in which the writer does not own an equivalent position in

the underlying security represented by his option contracts.

Uncovered put writing

A short put option position in which the writer does not have a corresponding short

position in the underlying security or has not deposited, in a cash account, cash or

cash equivalents equal to the exercise value of the put.

Underlying security

The security subject to being purchased or sold upon exercise of the option contract.

Volatility

A measure of the fluctuation in the market price of the underlying security.

Mathematically, volatility is the annualized standard deviation of returns. See the

sections in 'Options' which describes implied and historical volatility.

Writer

The seller of an option contract.

Macroeconomic Glossary

Arbitrage: to buy a good in one market and then resell the good in another market

for a higher price.

Budget Deficit - Budget in which expenditures is greater than revenues.

http://www.karvy.com/drvtives/glossary.htm#top#tophttp://www.karvy.com/economy/glossary.htm


24

Balance of trade - That part of a nation's balance of payments dealing with imports

and exports, that is trade in goods and services, over a given period. If exports of

goods exceed imports, the trade balance is said to be 'favorable'; if imports exceed

exports, the trade balance is said to be 'unfavorable.'

Barter – The trade in which merchandise is exchanged directly for other

merchandise. No money is used. Barter is important in countries using currency not

readily convertible to another form of currency.

Budget - a plan for the use of money based on goals and expected income and

expenditures.

Bank, commercial - A financial institution accepts checking deposits, holds savings,

sells traveler's checks and performs other financial services.

Complementary goods and services - goods or services for which there is an

inverse relationship between the price of one and the demand for the other; when

the price rises (falls) the demand for the other decreases (increases).

Capital formation - The use of money and other resources to increase inventories,

to produce new plants, tools and equipment, which will improve productive capacity.

Comparative advantage - The principle of comparative advantage states that a

country will specialize in the production of goods in which it has a lower opportunity

cost than other countries.

Competition - The effort of two or more parties acting independently to secure the

business of a third party by offering the most favorable terms.

Consumers - People whose wants are satisfied by consuming a good or a service.

Consumption - The total spending made on consumer goods & services by

individuals or a nation during a given period. Strictly speaking, consumption should

apply only to those goods totally used, enjoyed, or "eaten up" within that period. In

practice, consumption expenditures include all consumer goods bought, many of

which last well beyond the period in question --e.g., furniture, clothing, and

automobiles.

Consumer spending - The purchase of consumer goods and services.

Costs of production - All resources used in producing goods and services, for which

owners receive payments.

Credit - In monetary theory, the use of someone else's funds in exchange for a

promise to pay (usually with interest) at a later date. The major examples are short-

term loans from a bank, credit extended by suppliers, and commercial paper. In

balance-of-payments accounting, an item such as exports that earns a country

foreign currency.

Capitalism - An economic system, in which the means of production are privately

owned, controlled and which is characterized by competition and the profit motive


25

Cost push inflation - Price increases stemming from production cost increases

rather than increased demand

Cartel: a group of firms acting together to coordinate output decisions and control

prices as if they were a monopoly firm

Ceteris paribus: a Latin phrase meaning "other things being equal." It is used to

remind the reader that all variables other than the ones being studied are assumed

to be constant.

Consumer price index (CPI): the price index most commonly used to measure the

impact of changes in prices on households. The index is based on a standard market

basket of goods and services purchased by a typical urban family.

Capital Markets - The market in which corporate equity and longer-term debt

securities (those maturing in more than one year) are issued and traded.

Central Bank - The principal monetary authority of a nation, a central bank

performs several key functions, including issuing currency and regulating the supply

of credit in the economy. The RBI is the Central Bank of India.

Central Bank Intervention – The buying or selling of currency, foreign or

domestic, by central banks, in order to influence market conditions or exchange rate

movements.

Crowding out - The claim that an increase in government borrowing or expenditure

leads to a reduction in private investment through higher interest rates.

Currency appreciation - An increase in the value of one currency relative to

another currency. Appreciation occurs when, because of a change in exchange rates,

a unit of one currency buys more units of another currency.

Currency revaluation - A deliberate upward adjustment in the official exchange

rate established, or pegged, by a government against a specified standard, such as

another currency or gold.

Currency Depreciation - A decline in the value of one currency relative to another

currency. Depreciation occurs when, because of a change in exchange rates, a unit

of one currency buys fewer units of another currency.

Currency devaluation - A deliberate downward adjustment in the official exchange

rate established, or pegged, by a government against a specified standard, such as

another currency or gold.

Current account balance - The difference between the nation's total exports of

goods, services, and transfers and its total imports of them. Current account balance

calculations exclude transactions in financial assets and liabilities.

Deficit - The amount each year by which government spending is greater than

government income.


26

Dirty Float - A type of floating exchange rate that is not completely freely floating

because central banks intervene from time to time to alter the rate from its free-

market level. It is still a floating rate because it has not been pegged at a

predetermined par value.

Deficit Financing - A situation in which government spending exceeds government

income, with the difference covered by borrowing.

Depression - A severe decline in business activity frequently accompanied by high

unemployment, low production, curtailed consumer buying restricted credit, etc.

Dumping - Exporting products to a country for sale-- at below actual market price

to break down competition

Deflation - A sustained and continuous decrease in the general price level.

Division of labor - The process whereby workers perform only a single or a very

few steps of a major production task (as when working on an assembly line) & they

become specialized in that particular task.

Demand - the various quantities of product consumers are willing able to purchase

across a range of prices during a specified period of time. A table (demand schedule)

or a graph (demand curve) may represent demand.

Demand curve - a curve (set of points on a graph) which shows the various

amounts of a product consumers are willing and able to purchase across a range of

prices during a specified period of time.

Economics - the social science concerned with using scarce resources to obtain the

maximum satisfaction of the unlimited wants of society; the study of using limited

resources to meet unlimited wants.

Economic growth - An increase in the total output of a nation over a period of time

is called economic growth. Economic growth is usually measured as the annual rate

of increase in a nation's real GDP.

Economic system - The collection of institutions, laws, activities, controlling values,

and human motivations that collectively provide a framework for economic decision

making.

Equilibrium price - The market-clearing price at which the quantity demanded by

buyers equals the quantity supplied by sellers.

Exchange rates - The rate, or price, at which one country's currency is exchanged

for the currency of another country.

Exports - Goods or services produced in one nation but sold to buyers in another

nation.


27

Economies of scale - An increase in the factors of production, as in market

production resulting in a proportionate greater increase in productivity output per

unit of production.

Eurodollars - U.S. dollars placed on deposit in banks outside the United States

Economic shocks - Events that impact the economy, come from outside it, are

unexpected and unpredictable (e.g., Hurricane Andrew in 1991, the rise in oil prices

by OPEC).

Fiscal policy - The federal government's decisions about the amount of money it

spends and collects in taxes to achieve a full employment and non-inflationary

economy. It is of two types -

• Contractionary fiscal policy - A policy to decrease governmental

expenditures and/or to increase taxes. • expansionary fiscal policy - A policy to increase governmental

expenditures and/or to decrease taxes.

Fixed exchange rates system - Exchange rates between currencies, that is set at

predetermined levels and doesn’t move in response to changes in supply and

demand.

Flexible Exchange rate system - The flexible exchange rate system in which the

exchange rate is determined by the market forces of supply and demand without

intervention.

Foreign currency operations - Purchase or sale of the currencies of other nations

by a central bank for the purpose of influencing foreign exchange rates or

maintaining orderly foreign exchange markets. Also called foreign-exchange market

intervention.

Forwards - A type of foreign exchange transaction whereby a contract is made to

exchange one currency for another at a fixed date in the future at a specified

exchange rate. By buying or selling forward exchange, businesses protect

themselves against a decrease in the value of a currency they plan to sell at a future

date.

Futures - Contracts that require delivery of a underlying asset of specified quality

and quantity, at a specified price, on a specified future date. Futures are traded on

an exchange and are used for both speculation and hedging.

Fiat money: anything that serves as a means of payment by government

declaration

Free trade - Absence of tariffs and regulations designed to curtail or prevent trade

among nations, an atmosphere in which impediments to trade among nations are

removed.


28

Functions of money - The roles played by money in an economy. These roles

include medium of exchange, standard of value, and store of value.

Full employment - A term that is used in many senses. Historically, it was taken to

be that level of employment at which no (or minimal) involuntary unemployment

exists. Today economists rely upon the concept of the natural rate of unemployment

to indicate the highest sustainable level of employment over the long run.

Factors of production – are the resources that are used for producing goods &

services. Following are the factors of production in an economy:

• Entrepreneurial ability - a type of labor; the human resource which

combines the basic resources to produce a product, makes non - routine decisions,

innovates, and bears risks. • Labor - the physical and mental talents (efforts) of humans, which can be

used to produce goods and services. • Land - natural resources ("free gifts of nature") which can be used to produce

goods and services. • Capital - tools used in economic production. Money is a form, or subset, of

capital. Investment in capital is critical for the efficient use of land and labor.

Knowledge is capital, thus, schools produce capital goods.

Goods - Objects that can satisfy people's wants.

Gross domestic product (GDP) - The value, expressed in rupees, of all final goods

and services produced in a year.

Gross domestic product (GDP), real - GDP adjusted for inflation.

Gold standard - A monetary system in which currencies are defined in terms of a

given weight of gold.

Gresham's law: the tendency of the inferior of two forms of currency to circulate

more freely than the superior form of money because people hoard the superior

form.

Gross fiscal deficit – is the difference between total receipts (excluding

government borrowing) & the total expenditure of the government.

Hyperinflation: inflation at a very high rate. Usually reserved for annual inflation

rates exceeding 200 percent.

Households - Individuals and family units which as consumers, buy goods and

services from firms and, as resource owners, sell or rent productive resources to

business firms.

Imports - Goods or services bought from sellers in another nation.

Inflation - A sustained and continuous increase in the general price level.

Interest rates - The price paid for borrowing money for a period of time, usually


29

expressed as a percentage of the principal per year.

Investment - The purchase of a security, such as a stock or bond is called

investment. It is of 3 types -

• Investment in capital goods - Occurs when savings are used to increase

the economy's productive capacity by financing the construction of new factories,

machines, means of communication, and the like. • Investment in capital resources - Business purchases of new plant

and equipment. • Investment in human capital - An action taken to increase the productivity

of workers. These actions can include improving skills and abilities, education,

health, or mobility of workers.

Income effect: The change in consumption or leisure that results from a change in

an individual's purchasing power after a change in relative prices or income. Also

called the wealth effect.

International monetary fund - The IMF is an international organization

established in 1946 to promote international monetary cooperation, exchange

stability, and orderly exchange arrangements; to foster economic growth and high

levels of employment; and to provide temporary financial assistance to countries

under adequate safeguards to help ease balance of payments adjustment.

Law of demand - All else being constant, as price rises, quantity demanded falls; as

price falls, quantity demanded rises. In other words, there is an inverse relationship

between price and quantity demanded.

Law of diminishing marginal utility - as more of a good or service is consumed

within a given period of time, after some point, the additional satisfaction derived

from each additional unit will begin to decline.

Law of supply - The principle that price and quantity supplied are directly related.

Laissez Faire - French phrase meaning to "leave alone": generally referring to

nonrestrictive atmosphere for business activity; a policy of limited government

regulation and interference with business and trade.

Monetized deficit – is that part of fiscal deficit that is financed by the RBI. In other

words, the increase in net RBI credit to the Government is called Monetized deficit.

Marginal benefit: the rupee value placed on the satisfaction obtained from another

unit of an item

Marginal cost: the sacrifice made to obtain an additional unit of an item; the cost of

producing an additional unit of an item.

Marginal product (of an input): the increase in output that results from using one

more unit of an input when the quantity of all other inputs is unchanged.


30

Marginal propensity to consume: the additional consumption that results from an

increase in disposable income. The MPC is equal to the change in consumption

spending divided by the change in disposable income. Often times, it is

advantageous to think of an income change as either permanent or transitory. In this

framework, the MPC from a change in permanent income is much larger than the

MPC from a change in transitory income.

Marginal propensity to save: the additional saving that results from an increase in

disposable income. The MPS is equal to the change in saving divided by the change

in disposable income. Often times, it is advantageous to think of an income change

as either permanent or transitory. In this framework, the MPS from transitory

income changes is much larger than the MPS from permanent income changes.

Marginal revenue: the extra revenue obtained from selling an additional unit of a

good

Multiplier: The two types of multipliers that most frequently appear in economics

are the money multiplier and the expenditure multiplier.

1. The simple money multiplier is the reciprocal of the reserve-deposit ratio. A more accurate money multiplier is equal to (1 + cd)/(cd + rd), where cd denotes the

currency-deposit ratio and rd denotes the reserve-deposit ratio. 2. The expenditure multiplier is a hallmark of Keynesian models. The expenditure multiplier is equal to 1/(MPS+MPI), where MPS denotes the marginal

propensity to save and MPI denotes the marginal propensity to import. Expenditure

multipliers do not appear in market-clearing models since the rational agents act to

dampen the impact of shocks to the economy.

Market - A setting where buyers and sellers establish prices for identical or very

similar products, and exchange goods and/or services.

Medium of exchange - One of the functions of money whereby people exchange

goods and services for money and in turn use money to obtain other goods and

services.

Mixed economy - The dominant form of economic organization in noncommunist

countries. Mixed economies rely primarily on the price system for their economic

organization but use a variety of government interventions (such as taxes, spending,

and regulation) to handle macroeconomic instability and market failures.

Monetary policy - The objectives of the central bank in exercising its control over

money, interest rates, and credit conditions. The instruments of monetary policy are

primarily open-market operations, reserve requirements, and the discount rate.

Money - Anything that is generally accepted as a medium of exchange with which to

buy goods and services, a good that can be used to buy all other goods and services,

that serves as a standard of value, and has a store of value.

Money supply – is the amount of money available in the economy at any given

point of time. It includes currency notes & coins with the public, time & deposits of

the bank & money in the post office savings account.


31

Money market - A term denoting the set of institutions that handle the purchase or

sale of short-term credit instruments like Treasury bills and commercial paper.

National income - The amount of aggregate income earned by suppliers of

resources employed to produce GNP, net national product plus government subsidies

minus indirect business taxes.

Normative economics - Normative economics considers "what ought to be"--value

judgments, or goals, of public policy. Positive economics, by contrast, is the analysis

of facts and behavior in an economy, or "the way things are."

Opportunity cost - The benefit from next best alternative that must be given up

when a choice is made.

Price - the quantity of money (or other goods and services) paid by the consumer

and received by the producer for a unit of a good or service.

Price elasticity of demand - the ratio of the percentage change in quantity

demanded of a product to the percentage change in its price; the responsiveness or

sensitivity of the quantity of a product consumers demand to a change in the price of

that product.

Public goods - A commodity whose benefits are indivisibly spread among the entire

community, whether or not particular individuals desire to consume the public good.

For example, a public-health measure that eradicates smallpox protects all, not just

those paying for the vaccinations. The government often provides these goods.

Protectionism - A policy by which governments impose trade barriers ( tariffs and

quotas) on foreign products (imports) to protect domestic producers and their

workers from being undersold. Protectionism means higher prices on imported goods

but lower unemployment and better wages.

Revenue deficit – is the difference between Government’s revenue expenditure &

revenue receipts.

Substitute goods and services - goods or services such that there is a direct

relationship between the price of one and the demand for the other; when the price

of one rises (falls) the demand for the other increases (decreases).

Standard of living - A minimum of necessities, comforts, or luxuries held essential

to maintaining a person or group in customary or proper status or circumstances.

Surplus - The situation resulting when the quantity supplied exceeds the quantity

demanded of a good or service, usually because the price is for some reason below

the equilibrium price in the market.

Say's law: the idea that total spending will always be sufficient to purchase the total

output produced. That is, supply creates its own demand.


32

Transfer payments: payments for which no good or service is currently received in

return and that therefore do not represent expenditures for the purchase of final

products. E.g. – Pensions, grants from abroad etc.

Trade-off - Giving up some of one thing to get some of another thing.

Unemployment - The situation, in which people are willing and able to work at

current wage rates, but do not have jobs.

Wages - The payment resource earners receive for their labor.

World Trade Organization (WTO) - An international organization established in

1995 that deals with the global rules of trade among nations. Its predecessor is the

General Agreement on Tariffs and Trade (GATT). Originally envisioned in 1944, it is

designed to be one of the three organizations that would help bring economic

stability and growth to the world, the other two "legs" are the World Bank and the

International Monetary Fund (IMF

Debt Market Glossary

Accrued interest

The interest that is due and payable at a point of time.

Accrual Bond

A Bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the principal of the bond and is paid at the time of maturity.

Annual percentage yield (APY)

The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.0112 -1). This is similar to the concept of Annual Rate of Return.

Annuity

A regular periodic payment made under agreement for a specified period of time.

Arbitrage:

http://www.karvy.com/debt/glossary.htm


33

The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. However, arbitrage opportunities are often precluded because of transaction costs

Asset liability management

It is a technique of liquidity management to ensure that the tenure of liabilities more or less match with the average tenure of the assets. This concept is of utmost importance to banks and financial institutions in the spreads business.

Balloon

Scheduled final principal repayment that is substantially larger than the preceding scheduled principal repayments.

Benchmark rate

A standard interest rate used for comparison. Globally the LIBOR is considered as a benchmark rate. In India the Government T-Bill rate is considered as a benchmark rate. All variable rate instruments are expressed as a spread over the benchmark rate.

Basis Point

It represents 1/100th of a percentage point. In other words, 100 basis points is equal to one percent

Beta

A measure of a security's sensitivity to changes in the overall market. It is the extent to which changes in security returns can be explained by the market. A beta of 0.9 means that a 1 % change in the market in the short run implies a 0.9 % change in the value of the security. Securities with a beta greater than unity are classified as aggressive securities.

Bullet

A security with one principal payment on the settlement date.

Bearer bond

These are bonds that are not registered in the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.

Bond

A bond is a contract between two parties where the owner of the bond is promised interest and principal repayment in exchange for the money paid for the bond. When an investor buys bonds, he or she is lending money.

Bond indenture


34

It is the contract that sets forth the promises of a corporate bond issuer and the rights of investors.

Bond indexing

It is the designing of a bond portfolio so that its performance will match the performance of some bond index.

Brady bonds

These are bonds issued by emerging countries under a debt reduction plan.

Callable Bonds

These are bonds that give the right to the issuer to redeem the bonds before the maturity after an agreed period of time from the issue date. The issuer in the event of a falling interest regime, which permits them to raise funds at a lower rate, exercises these call options.

Call price

Price at which a callable security can be redeemed by the issuer.

Cap/ceiling

An interest rate cap/ceiling agreement whereby one party agrees to compensate the other if the reference rate exceeds a predetermined level.

Credit rating

A published ranking, based on detailed financial analysis by a credit bureau, of one's financial soundness, specifically relating to one's ability to service debt obligations. The highest rating is usually AAA, and the lowest is D. In India Crisil is the largest credit rating agency.

Convexity

It measures the sensitivity of the yield to maturity (YTM) of a bond to changes in duration of the bond.

Compound interest

Interest earned on interest as well as on principal.

Convertible security

A security that can be exchanged, at a specified price, for shares of the issuer's stock.

Cross over yield

Rate of interest at which yield-to-maturity and yield-to-call of a security are equal.

Current yield


35

The ratio of coupon interest to the current market price. It reflects the interest yield at the point of entry.

Delay

For asset backed securities, the period between issuance and the first payment of coupon and principal.

Debenture

An unsecured bond whose holder has the claim of a general creditor on all assets of the issuer not pledged specifically to secure other debt. Usually issued by corporates.

Debt market

The market for trading debt instruments.

Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.

Deep-discount bond

A bond issued with a very low coupon or no coupon and selling at a price far below par value. When the bond has no coupon, it is called a Zero coupon bond.

Default

Failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture.

Default premium

A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.

Default risk

Also referred to as credit risk (as gauged by commercial rating companies), the risk that an issuer of a bond may be unable to make timely principal and interest payments.

Discounted cash flow (DCF)

Future cash flows multiplied by discount factors to obtain present values

Duration

A common gauge of the price sensitivity of a fixed income asset or portfolio to a change in interest rates.

Effective spread


36

A spread off the floating-rate index that makes the average present value equal to the current price.

Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of compounding.

Effective annual yield

Annualized interest rate on a security computed using compound interest techniques.

Effective convexity

The convexity of a bond calculated using cash flows that change with yields.

Equivalent bond yield

Annual yield on a short-term, non-interest bearing security calculated in order to be comparable to yields quoted on coupon securities.

Equivalent taxable yield

The yield that must be offered on a taxable bond issue to give the same after-tax yield as a tax-exempt issue.

Eurobond

A bond that is (1) underwritten by an international syndicate, (2) issued simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country.

Eurodollar bonds

Eurobonds denominated in U.S dollars.

Euroyen bonds

Eurobonds denominated in Japanese yen.

Extendable bond

Bond whose maturity can be extended at the option of the lender or issuer.

Financial risk

The risk that the cash flows of an issuer will not be adequate to meet his financial obligations. Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.

Flattening of the yield curve


37

A change in the yield curve where the spread between the yield on a long-term and short-term treasury has decreased.

Flat price

Price of a bond without accrued interest. Bond traders typically quote flat price, although purchasers pay the full price (full price = flat price + accrued interest).

Floating coupon rate

Coupon rate that varies with ("floats against") a standard market benchmark or index.

Floating rate index

A basket of bonds, Treasuries, currencies, or other financial instruments used as a benchmark for floating rate notes.

Floating rate-note

Government or agency security with a floating coupon, reset periodically against a short-term index such as the three-month or six-month LIBOR.

Floor

An interest rate floor agreement whereby one party agrees to pay the other if the reference rate falls below a predetermined level.

Funded debt

Debt maturing after more than one year.

General obligation bonds

Municipal securities secured by the issuer’s pledge of its full faith, credit, and taxing power.

Hedge

A transaction that reduces the risk of an investment.

High grade bond

Bond rated triple-A or double-A by Standard & Poor's or CRISIL.

Horizon curve

A yield curve used to forecast the effects, at a particular point in the future, of interest-rate changes on an investment.

High-coupon bond refunding

Refunding of a high-coupon bond with a new, lower coupon bond.


38

Indenture

Agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of the bondholder. Document spelling out the specific terms of a bond as well as the rights and responsibilities of both the issuer of the security and the holder

Insured bond

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

Internal rate of return (IRR)

Discount rate at which Net present value (NPV) of the investment is zero. The rate at which a bond’s future cash flows, discounted back to today, equals its current price.

Inverted yield curve

Yield curve in which short-term rates are higher than long-term rates. This usually reflects diminishing confidence in the future and is a sign of impending recession in the economy.

Junk bond

A bond with a speculative credit rating of BB (S&P) or BA (Moody's) or lower is a junk or high yield bond. Such bonds offer investors higher yields than bonds of financially sound companies.

Lead managers

The leading member of the syndicate issuing a new security such as a corporate bond. The lead manager administers the marketing, allocation, and delivery of the security. The lead manager--in consultation with the borrower--also selects co-managers; determines the initial and final terms of the issue; selects the underwriters; and selects the selling group.

Lien

A legal claim against an asset which is used to secure a loan and which must be paid when the property is sold.

LIBOR

London Interbank Offered Rate. The LIBOR is "the average of interbank offered rates for dollar deposits in the London market based on quotations at five major banks." The rate is published daily in the Wall Street Journal "Money Rates" section. This rate forms the benchmark for most floating rate debt issues.

Laddering strategy

A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range. It is an example of a passive investment strategy.


39

Liquidity

A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease. When there are many securities then the market is liquid in the broad sense and when these securities have sufficient volumes then the market is liquid in deep sense.

Long bonds

Bonds with a long current maturity.

Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.

Make whole provision

Is related to the lump sum payments made when a loan or bond is called, equal to the NPV of future loan or coupon payments not paid because of the call. The payment can be significant and negate the attractiveness of a call.

Mark-to-market

The process whereby the book value or collateral value of a security is adjusted to reflect current market value.

Marked-to-market

An arrangement whereby the profits or losses on a futures contract are settled each day.

Maturity

For a bond, the date on which the principal is required to be repaid

Maturity date

Usually used for bonds. Date that the bond finishes and is paid off. Date on which the principal amount of a note, draft, acceptance, bond, or other debt instrument becomes due and payable.

Maturity spread

The spread between any two maturity sectors of the bond market.

MIBID/MIBOR

Mumbai Interbank Bid and Offer rates. Calculated by the average of the interbank offer rates based on quotations at nearly 30 Major banks.

Market index


40

Also called "index." Statistical composite that measures changes in the economy or financial markets. Often expressed in percentage changes from a base year or from the previous month.

Mismatch bond

Floating rate note whose interest rate is reset at more frequent intervals than the rollover period (e.g. a note whose payments are set quarterly on the basis of the one-year interest rate).

Modified duration

The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.

Municipal bond

State or local governments offer municipal bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Net present value (NPV)

The present value of the expected future cash flows minus the cost.

Nominal rate of return

The total percentage increase in the value of an investment over the holding period.

Nominal yield

The annual amount of income from the security divided by the face amount of the security. The result is stated as a percentage. When the security is sold at par, the nominal yield and actual yield are the same.

Notional principal

The amount used as a base for computations. Notional principal plays a conceptual role in determining the amount of the interest payments. This is not the principal amount that is actually transferred from one party to another.

Open-market operation

Purchase or sale of government securities by the monetary authorities (RBI in India) to increase or decrease the domestic money supply. A sale of government securities is a sign of a dear money policy while a purchase of government securities is a sign of a cheap money policy.

Par

Equal to the nominal or face value of a security. A bond selling at "par," for instance, is worth an amount equivalent to its original issue value or its value upon redemption at maturity


41

Purchasing power risk

The risk of loss in the value of an asset’s cash flow due to inflation. Also referred to as inflation risk

Put option

An option that gives the option buyer the right, but not the obligation, to sell (go "short") the underlying futures contract at the strike price on or before the expiration date.

Purchase date

The date on which the holder originally purchased the security.

Purchase price

The flat price of the security paid when originally purchased by the holder.

Par value

Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.

Pass-through securities

A pool of fixed-income securities backed by a package of assets (i.e. mortgages) where the holder receives the principal and interest payments.

Premium bond

A bond that is selling for more than its par value.

Principal amount

The face amount of debt; the amount borrowed or lent. Often called principal.

Pure-discount bond

A bond that will make only one payment of principal and interest.

Put bond

Relatively uncommon type of bond which allows the bondholder to redeem the bond at a specified price prior to maturity.

Rate risk

In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed rate loans or other fixed-rate assets.

R

dr p.sravan kumar mba,phd ipo glossary...dr p.sravan kumar mba,phd 3 guest user - a person who is...

Documents