A New Issue of Moral Cents is Out!
April 23rd, 2013We are close to the five-year anniversary of the global financial crisis, if we take ...
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Income Statement
A financial statement that shows a company’s performance through its revenues and expenses. The income statement includes both operating and non-operating expenses and includes net profit or loss. The Income Statement is one of the three main financial statements with Statement of Cash Flows and the Balance Sheet being the other two. Income statements are also known as Profit and Loss Statements.
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Index
A formula that tracts the progress of a basket of stocks. Some such as the S&P 500 or Dow Jones are commonly used as benchmarks for the American economy.
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Index arbitrage
A process whereby one makes risk-free profit (arbitrage) through index futures. Because the forward price of a portfolio is strictly less than its nominal price, one can short the future at that nominal price while buying the index-replicating portfolio. When the future is settled one sells the portfolio, making the difference between nominal and forward price risk-free.
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Index futures
An example of a financial future. The future tracks a specific index; the price of the future at expiration is the same as the price of the index on that day.
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Inflation
Inflation is the general increase in the price of goods and services. When inflation rises, purchasing power falls. Two theories for the causes of rising inflation include demand-pull, which says that demand rises faster than supply so prices go up, and cost-push, which says that the increase in wages and materials is pushed to the consumer making everything more expensive. The Federal Reserve Bank decides the interest rate taking into account inflation. The Fed keeps the rate low to foster growth (and inflation) or sets the rate higher to curb future inflation. Despite popular belief, inflation is not inherently bad. It is too much or too little inflation that causes ill effects.
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Initial Public Offering (IPO)
When a private company becomes public, it does an Initial Public Offering. It is the first sale of stock by a company to the public. IPOs may be used by smaller companies looking for more capital to expand or by older companies looking to go public. During an IPO the company will hire an underwriting firm to help determine the best price and time to go to the market.
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Insider Trading
The buying or selling of a security by someone who has information about the security that is not available to the public. Insider trading is illegal and is closely watched for by the Securities and Exchange Commission as well as the Federal Bureau of Investigation.
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Insider Trading
The trading of a security while in possession of nonpublic information material to that security. It is illegal in the United States.
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Institutional Investors
A non-bank entity that buys or sells securities in large enough quantities to get different treatment from other investors. For example institutional investors are charged lower commission fees. These entities also have fewer protective regulations because it is assumed that they know what they are doing. Institutional investors typically manage money for other people who are their clients. Examples of institutional investors would be pension funds and life insurance companies.
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Interest-rate swap
A trade in which one party pays a fixed interest rate on a notional sum, while the other party pays a floating rate, usually set by LIBOR.
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Internal Rate of Return (IRR)
This is the interest rate that a project is expected to generate. Also calculated as the discount rate that makes the net present value of all cash flows equal to zero. With all things equal, an investment with a higher IRR should generate a greater return. Note that IRR is the interest rate expected and will often differ from the actual interest rate the investment generates.
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International Bonds
A debt security issued in a different country or currency. These bonds are influenced by currency risk as well as the risk of default. Examples include Eurobonds, foreign bonds, and global bonds.
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International Finance Corporation (IFC)
The IFC is a member of the World Bank Group and works to promote private sector investment in developing countries. The ways they do this include financing private sector projects in developing countries and providing advice to businesses and governments in poorer countries.
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International Monetary Fund (IMF)
An international organization created to monitor economic development, lend funds to struggling countries, and provides training for countries who ask. The IMF is home to all members of the U.N. and helps facilitate international trade.
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Intrinsic Value
This is the true value of a company. This value usually differs from the market value. Investors hope to profit from the difference. There are many different methods of finding the intrinsic value, hence there may be variation in intrinsic values for one company. Intrinsic value can also refer to options where it is the difference between the underlying stock’s price and the strike price.
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Investment bank
A financial institution that acts as an underwriter for corporations issuing securities. I-Banks also offer advisory services for investors, assist in mergers and acquisitions, and private equity placements. Investment banks are on the “sell side” of finance meaning they give advice to buy side investors.
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Investment Grade Bonds
Bonds that have a low risk of default. These bonds are said to be the bonds with the highest credit ratings (besides treasury bills that are not rated) meaning that they have the lowest risk of default. Ratings for investment grade usually rang from AAA (lowest chance of default) to BBB (higher chance of default but still considered investment grade). Ratings are performed by private agencies such as Standard & Poor’s, Moody’s, and Fitch.
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Investment management
The process of buying, selling, holding, and allocating investments within a portfolio in order to obtain the best returns. Investment management can be done by a single individual or it can be done by a group of professionals at a large fund. Strategies can differ from one fund to the next but investment managers develop these strategies to try and reach the objectives of the investors.
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Junk Bonds
Also known as speculative grade bonds, these bonds have a much higher risk of default. Because of this high risk of default, the potential yields on these bonds are much higher than bonds with better credit ratings. Speculative grade bonds are seen as bonds with credit ratings BB and below. Ratings are performed by private agencies such as Standard & Poor’s, Moody’s, and Fitch
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Kondratieff Wave Theory
A theory suggesting that capitalist economies will experience periods of growth and deep recession around a 50 year period. The theory states that a period of high growth will be followed by a recession, a recovery where the economy will plateau, and then an economic crisis will cause another more severe depression and then start the cycle again. This cycle of constant renewal and destruction is also known as “supercycles”, “Kondratiev waves”, “K-waves”, “surges”, or “long waves”.
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Letters of Credit
A letter from a bank guaranteeing that the seller will be paid for the goods a buyer has purchased. If the buyer is unable to pay, the bank will honor the buyer’s obligation. Letters of credit are commonly used in international business as both parties trust the bank to make the payments.
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Leverage
This refers to the use of borrowed capital to increase the return on investment. It also refers to the amount of debt a company uses to fund its assets. A company that is highly leveraged refers to a company that has a great deal more debt than equity. Leverage is essentially used to magnify profits but it can also magnify losses.
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Leveraged Buyout (LBO)
An LBO is when a company uses considerable amounts of debt (leverage) to buy another company. The acquired company’s assets are sometimes used as collateral for the loans. The ratio is usually around 90% debt to 10% equity during an LBO. Because of the small amount of capital, the bonds created to fund this are usually very low quality or junk bonds. An LBO helps a company purchase another company without having to put up large amounts of capital.
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Liabilities
These are economic obligations of an entity. Liabilities include loans that the company has taken out, expenses, and deferred revenues. Current liabilities must be paid in one year while long-term liabilities are longer than one year.
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Liquidity
How easily an asset can be sold without losing significant value. Highly liquid assets can be bought and sold quickly while illiquid assets would lose value. If an entity has no liquid assets it cannot quickly sell the assets to pay off unexpected liabilities.
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Liquidity Ratios
A ratio that indicates how well a company can pay off short-term liabilities. The higher the ratio, the more likely the company is able to pay it off. The higher the ratio, the more liquid the company’s assets are.
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London Interbank Offering Rate (LIBOR)
The rate at which banks can borrow funds from other banks in the London Interbank market. The British Bankers’ Association decide on LIBOR rates on a daily basis
