A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
- For an investment (e.g., a bond, or syndicated loan), illiquid is the inability to convert it to cas quickly and at a low cost -- bid/ask spread plus commissions. See "liquidity".
Insurance bonds, sometimes referred to as 'investment bonds' are single -premium savings contracts issued by life insurance companies. They are collective investments. Just like unit trusts, the investor hands over his money to a fund manager who uses his expertise to make the investment grow as quickly as possible.
An increase -or decrease - in the value of the investment fund is reflected in an increase or decrease in the value of the investor's units. There are key differences between insurance bonds and unit trusts, so prospective investors need to make their choice carefully with the help of an . In the past, some financial advisers have preferred to sell insurance bonds because they have traditionally paid a higher commission (often 5%) compared with unit trusts which pay less (often 3%). Insurance bonds differ from unit trusts in several ways but principally in the area of taxation. With Insurance bonds, most of the taxation is already taken care of before the investors receives any return. In other words, the taxation of a bond takes place within the fund - the insurance company pays both income and Capital gains tax (CGT). For basic rate taxpayers, there will be no further tax to pay on any gains from an Insurance Bond. But higher rate taxpayers will face a further tax burden, but even here the tax due can be deferred. Bonds are not suitable for non-taxpayers as the tax deducted within the fund cannot be recovered.
- Bonds can offer useful income flexibility within a lower risk environment, and can be particularly useful in planning because they can be written under trust. There is a moneyeXtra UK Guide to Making a Will which may be useful. In fact you can combine all the elements - have a lower risk bond which produces income whilst helping your CGT position. For added tax flexibility, you may choose to look at offshore insurance bonds. These allow you to 'roll up' the income gross of tax. But remember, you may be taking added risk if you invest offshore because you will fall outside the UK's investor protection legislation.
The price you pay for borrowing money. The rate of interest you are charged on a loan will vary according to the level of base rates and if you are taking a repayment loan, the length of time over which you're planning to repay the loan.
- The interest rate you pay can be calculated in several different ways. The norm in mortgage lending is for interest to be calculated annually as a percentage of the outstanding capital balance.
International Swaps and Derivatives Association (ISDA)
- The principal trade association for Swap and Derivatives dealers, as well as allied organizations.
- "The credit risk to the issuer of traded instruments (typically a bond, but also swaps, foreign exchange, etc.). Labeling credit spread volatility as either market or credit risk is a question of semantics. CreditMetrics addresses market price volatility as it is caused by changes in credit quality."
- "Stand-alone obligors have some likelihood of each possible credit quality migration. Between two obligors there is some likelihood of each possible joint credit quality migration. The probabilities are commonly influences by the correlation between the two obligors."
- "Characterizes relative peakedness or flatness of a given distribution compared to a normal distribution. It is the fourth moment of a distribution. Since the unconditional normal distribution has a kurtosis of 3, excess kurtosis is defined as Kx-3."
leptokurtosis (fat tails)
"The property of a statistical distribution to have more occur- rences far away from the mean than would be predicted by a Normal distribution. Since a normal distribution has a kurtosis measure of 3, excess kurtosis is defined as Kx-3 > 0."
- "A credit portfolio loss distribution will typically be leptokurtotic given positive obligor correlations or coarse granularity in the size / number of exposures. This means that a downside confidence interval will be further away from the mean than would be expected given the standard deviation and skewness."
letter of credit (LOC)
"A promise to lend issued by a bank which agrees to pay the addressee, the 'beneficiary', under specified conditions on behalf of a third party, also known as the 'account party'."
- "There are different types of letters of credit. A financial letter of credit (also termed a stand-by letter of credit) is used to assure access to funding without the immediate need for funds and is triggered at the obligor's discretion. A project letter of credit is secured by a specific asset or project income. A trade letter of credit is typically triggered by a non credit related (and infrequent) event."
LIBOR stands for London Inter-Bank Offer Rate. It's the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in the City of London. Money can be borrowed overnight or for a period of in excess of five years. The most often quoted rate is for three month money. '3 month LIBOR' tends to be used as a yardstick for lenders involved in high value transactions. They tend to quote rates as 'points above LIBOR'. So if 3 month LIBOR were (say) six per cent, a bank may choose to lend to another bank at (say) 6 and a quarter per cent. e.g., a quarter per cent above 3 month LIBOR.
Lending to individuals tends to be based on base rates which are set by the Chancellor after consulting with the Bank of England. Base rates tend to be less volatile. Some home lenders offer mortgage rates linked to LIBOR. The lender offers funds in Sterling or in a foreign currency. Bear in mind that LIBOR-linked borrowing by individuals is higher risk, especially if you are borrowing in a foreign currency.
The LIBOR rates are set each day at 11am by leading banks but rates fluctuate throughout the trading session according to sentiment about the outlook for base interest rates. LIBOR rates are listed each morning in the Financial Times and other newspapers.
- Banks also offer to borrow money in the wholesale money markets. The rate is called the London Inter Bank Bid Rate (LIBID).
- There are two separate meanings:
- At the enterprise level, the ability to meet current liabilities as they fall due; often measured as the ratio of current assets over current liabilities.
- At the security level, the ability to trade in volume without directly moving the market price. This is often judged by the width of the bid/ask spread and amount of daily turnover. The narrower the spread and the more the volume, the better the liquidity.
- The amount of loss on a credit instrument after the borrower has defaulted. It is typically stated as a percent of the debt's par value, it is one minus the recovery rate. This is the terminology used by the BIS. See Recovery Rate.
Loss in the Event of Default (LIED):
- This is just a longer way of saying "LGD". It is the less common of the two terms. See, Loss Given Default.
- A measure of the sensitivity of a financial instrument's value to a change in its yield. Macaulay Duration is an overestimate, and Modified Duration (q.v.) is a more precise measure.
- The weighted average of time until a financial instrument pays its cash flows. Each weight is proportional to the present value of the associated cash flow.
- Modified Duration (q.v.), times 1 + y/n , where y is the yield and n is the number of coupon payments per year.
mark to market
- The process in a futures market in which the daily price changes are paid by the parties incurring losses to the parties making profits
- For market-driven instruments, there is an amount at risk to default only when the contract is in-the-money (i.e., when the replacement cost of the contract exceeds the origination value). The exposure/uncertainty is captured by calculating the netted mean and standard deviation of exposure(s).
The potential for an investor to experience losses owing to day-to-day fluctuations in the prices at which securities can be bought or sold. So for example, equity price movements, FX and interest rates and commodity prices would all drive market risk.
- The dichotomy with credit risk blurs when it comes to dividing up value changes do to credit spread changes. Large components of credit spread changes can be attributed to both Government yield curve levels and to changes in credit quality/rating.
- A credit instrument who's exposure amount changes and is determined by (outside) market rate movements. Derivative instruments that are subject to counterparty default (e.g., swaps, forwards, options, etc.). The distinguishing feature of these types of credit exposures is that their amount is only the net replacement cost -- the amount the position is in-the-money -- rather than some full notional amount.
- The date on which a bond's/loan's principal is repaid to the investor/bank and interest payments cease.
- Most commonly, the arithmetic average of a population (or a sample of) observations. Also called the Arithmetic Average. Other measures of central tendency include the median, mode and (for cumulative values) the geometric mean.
- The statistical tendency in a time series to gravitate back towards some long-term average. This s on a much longer scale than another similar measure, called autocorrelation. These two behaviors are mathematically independent.
- Credit rating/quality migration describes the possibility that a firm or obligor with some credit rating today may move to (may "migrate" to) a range of possible other ratings/qualities by the risk horizon. For discrete rating categories, migration likelihoods can be summarized in a "transition matrix".
- The risk of loss due to weakness of the financial model(s) that a business uses for pricing inventory and managing risk.
- A measure of the sensitivity of a financial instrument's value to a change in its yield. The first derivative of a financial instrument's value with respect to a change in its yield.
moments (of a statistical distribution):
- Statistical distributions show the frequency at which events might occur across a range of likely values. The most familiar distribution might be a "Normal" (bell shaped) curve also referred to as a Gaussian distribution. In general however, the shape of any distribution can be described by its (infinitely many) "moments". The first four are listed here, but surprising many people lead perfectly happy and rewarding lives knowing no more than the first two:
- The first moment is the mean which indicates the central tendency of a distribution.
- The second moment is the variance which indicates the width or deviation.
- The third moment is the skewness which indicates any asymmetric "leaning" to either left or right.
- The fourth moment is the kurtosis which indicates the degree of central "peaked-ness" or, equivalently, the "fatness of the outer tails.
Monte Carlo simulation
- A technique for approximating a probability distribution by generating uniformly distributed pseudo random numbers and transforming them into the required sort of random numbers. In option pricing one ordinarily works with lognormal random interest rates, prices, and indexes. If one constructs the probability distributions correctly, then a Derivative Product's value equals the expected discounted value of its payoff (in the limit as the number of random paths approaches infinity).