AFP - CTP Exam Prep Flashcards
capital
The longer-term sources of funds used by a company, such as long-term debt, preferred stock, and common equity.
cash position
The quantity of cash that a company is holding at a given point in time.
disaster recovery
The restoration of systems and communications after an event causes an outage.
economies of scale
A relationship that occurs when an increase in sales lowers the average cost per unit sold.
financial planning and analysis
An organizational function that involves determining the need for present and future funding to support operations. An important part of this function is the forecasting of revenues, income, and external financing required to support the company’s planned growth.
financial risk
The risk that the overall value of an organization may change in response to a change in interest rates, foreign exchange rates, or commodity prices.
liquidity
The ability of an organization to convert assets into cash quickly and without a significant risk of loss.
operating cycle
A representation of the flow of funds through a company from the acquisition of raw materials, through the production cycle and the sale of products or services, and finally to the collection of payments from customers.
Sarbanes-Oxley Act of 2002 (SOX)
US legislation that requires companies to evaluate and disclose their internal financial controls as they relate to financial reporting, and requires auditors to attest to, or confirm, the effectiveness of these controls. It further requires that chief executive officers and chief financial officers certify financial statements, and specifies fines and jail sentences for knowingly and willfully misstating information therein. The act also requires companies with publicly traded securities to maintain independent audit committees (of the board of directors) that can interact with the external auditor in an unfettered way.
shared services center
A department or operation within a multiunit organization tasked with supplying multiple business units and their respective divisions and departments with specialized services, such as information technology, human resources, or accounts payable services.
virtual bank accounts
A set of internal ledgers (each of which can have its own bank account number) with only the header account being a real (legal) account.
working capital
The sum of a company’s current asset accounts (primarily cash, accounts receivable, and inventory) less the sum of its current liability accounts (primarily payables and accrual accounts).
working capital gap
The time gap between a cash outflow and a cash inflow.
bank capital requirements
Rules or regulations that specify the amount of capital (usually defined as equity funds) the owners of a bank must contribute to the business.
Bank Secrecy Act of 1970 (BSA)
A US legislative act under which US banks (and, in many cases, companies and individuals) are required to perform due diligence by determining a customer’s identity and monitoring transactions for suspicious activity. The primary intent of the act was to deter money laundering and the use of secret foreign bank accounts.
central bank
An entity that is responsible for implementing and managing a country’s monetary policy, including the country’s money supply and interest rates.
Check Clearing for the 21st Century Act of 2003 (Check 21)
A US law that provided the basis for electronic clearing of checks by allowing the substitution of a copy or image of a check for the original document in the clearing process.
Consumer Financial Protection Bureau
An independent consumer protection entity within the US Federal Reserve that was created as part of the Dodd-Frank Act of 2010.
Electronic Signatures in Global and National Commerce Act of 2000 (E-SIGN Act)
US legislation that was enacted to support electronic commerce (e-commerce) initiatives and grant digital signatures the same legal status as handwritten ink signatures. It establishes the legal certainty of e-commerce transactions and provides a measure of confidence around the enforceability of electronic transactions.
escheatment
The process of turning over unclaimed assets to the government, in specific instances.
European Central Bank
The central bank for the European Union (EU). This entity conducts a unified monetary policy for the eurozone, which includes all EU members that have adopted the euro as their common currency.
European Union
A union of more than two dozen member countries in Europe that have organized to work toward common political, social, and economic interests.
Federal Deposit Insurance Corporation (FDIC)
An independent agency of the US federal government whose primary role is to protect depositors from losses caused by bank insolvency. It preserves and promotes public confidence in the US financial system by (1) insuring deposits in banks and thrift institutions up to a maximum of $250,000 per depositor; (2) identifying, monitoring, and addressing risks to the Deposit Insurance Fund (DIF); and (3) limiting the effect on the economy and the financial system when a bank or thrift institution fails.
Federal Open Market Committee (FOMC)
The committee of the US Federal Reserve that runs the open market operations that help to implement US monetary policy and control the money supply.
Federal Reserve
The central bank for the United States, from the perspective of monetary policy.
Financial Crimes Enforcement Network (FinCEN)
The primary US government agency (operating as a bureau of the US Treasury) that oversees and implements policies to prevent and detect money laundering by criminal or terrorist organizations.
Financial Stability Oversight Council (FSOC)
A US agency created under the Dodd-Frank Act, whose primary responsibility is to prevent systemic risk from threatening the financial system by identifying threats to financial stability and gaps in regulations, and facilitating coordination across federal and state agencies.
foreign tax credit
A type of tax credit available to a company with foreign income that has already been taxed by the foreign jurisdiction. To relieve the effect of double taxation, US tax law grants a US company a tax credit against its total US income tax liability for foreign income taxes paid by the parent and its subsidiaries.
insolvency
The inability to pay one’s debts in a timely manner.
International Accounting Standards Board (IASB)
An international standards-setting body that determines accounting standards at the global level through a set of pronouncements called the International Financial Reporting Standards.
International Financial Reporting Standards (IFRS)
A set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. It is issued by the International Accounting Standards Board.
monetary policy
Government policy related to monitoring and controlling a country’s money supply and interest rates.
money laundering
Any financial transaction that generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting.
Office of Foreign Assets Control (OFAC)
An office of the US Department of the Treasury that administers and enforces economic and trade sanctions against targeted foreign countries, terrorist-sponsoring organizations, and international narcotics traffickers. It can impose controls on financial transactions and freeze foreign assets under US jurisdiction.
Office of the Comptroller of the Currency (OCC)
A bureau of the US Treasury Department that was established by Congress in 1863 to regulate the national banking system. It is the primary chartering authority and regulator for national banks.
over-the-counter market
A type of market that is more decentralized than a formal securities exchange. They rely upon electronic communication to conduct trading activity in an auction-style market between participating brokers and dealers.
par value
The face value of a security, such as commercial paper or a company share.
pension plan
A type of retirement plan, usually tax-exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement.
Securities and Exchange Commission (SEC)
A US federal agency designed to maintain a fair and orderly market for investors by regulating and supervising securities sales.
securities exchange
An organized exchange that facilitates the buying and selling of debt and equity securities.
systemic risk
The risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual organization, group, or component of a system. It is a risk imposed by linkages and interdependencies in a market or an economy that lead to a potential cascading failure that could bring down an entire banking system or market.
transfer pricing
The setting of the price that subsidiaries of a large corporation charge one another for economic activity between them.
Uniform Commercial Code
A set of proposals adopted by US states as laws to ensure uniformity for commercial financial transactions in the United States. It defines the rights and duties of all parties in a commercial transaction and provides a statutory definition of commonly accepted business practices.
use tax
A type of tax that is imposed directly on the consumer of goods that were purchased without paying sales tax.
value-added tax
A type of sales tax that involves charging a separate tax at each discrete stage of production and/or distribution based on the increased value (i.e., value added) occurring at that stage.
withholding tax
A tax that is deducted at the payment source and paid directly to the tax authorities where the payment originates. Tax authorities often apply this tax on interest, dividend, and royalty payments, which means this type of tax may be charged on funds being moved by multinational companies from one country to another.
ask price
The price or yield at which a dealer will sell a security.
balance sheet
A financial statement that reports a company’s financial condition—including assets, liabilities, and shareholders’ equity—at a point in time.
bid price
The price or yield at which a dealer will purchase a security.
broker-dealer
An entity that serves as an intermediary in the purchase and sale of capital market securities. It trades securities for its own account or on behalf of its customers.
capital adequacy
A factor that measures whether the amount of capital maintained relative to the nature and extent of an institution’s risks is sufficient given management’s ability to identify, measure, monitor, and control these risks.
captive finance company
A subsidiary of a large industrial corporation that finances purchases of the corporation’s products.
common equity
The capital contributed by stockholders and earnings retained in the business.
demand deposit account
An account through which an account holder uses a bank to transfer funds to, and receive deposits from, a third party. Also known as a checking account or a current account.
deposit insurance
A regulatory safeguard that protects the assets of smaller deposit customers who would be most harmed by a bank failure.
discount brokerage
A firm that lets investors make trades at reduced prices, but provides little or no investment advice.
distribution
An investment bank function that involves a securities sale to investors by an investment bank or syndicate of investment banks.
fiduciary
An individual or institution to which certain property is given to hold in trust according to a trust agreement.
foreign currency account
A bank account where deposit balances may be held in a currency other than that of the country in which the bank is located.
foreign exchange
The conversion of one country’s currency into that of another.
forward market
A financial market in which contracts for future delivery (futures) of currency or commodities are bought and sold.
impairment of capital rule
A regulatory restriction on the amount that a financial institution can lend or invest in a particular company or industry, based on the quality of the financial institution’s existing loan portfolio.
insurance company
A type of nonbank financial institution that sells insurance products.
investment bank
A financial intermediary that performs a variety of services, such as: (1) underwriting, by acting as an intermediary between an issuer of securities and the investing public; (2) providing custodial services; (3) facilitating mergers, acquisitions, divestitures, and other corporate reorganizations; and (4) acting as a broker/financial advisor for institutional clients.
municipal securities
Types of debt issued by city, county, or state government entities that generally have some type of income tax exemption for any interest paid on them.
private equity
An investment of either common or preferred stock in an operating company that is not publicly traded on an exchange. This investment sometimes involves the acquisition of an entire company.
private placement
The practice of the direct sale of long-term loans to institutional investors, such as insurance companies and hedge funds.
reserve requirement
A central bank requirement that establishes the minimum percentage of customer deposits that financial institutions must hold as reserves and not lend out to other customers.
revolving credit agreement
A committed line of credit established for a specified period of time, often on a multiyear basis. These are formal, contractual commitments with loan agreements, including covenants.
seigniorage
Government revenue from the issuance of coin and currency, which is based on the difference between the value of the money and the cost to produce it.
spot market
The market for immediate trading of currency or commodities.
spread
The difference between the bid and ask price of a particular security or asset. This also represents the dealer’s gross profit on a specific transaction.
stress test
An analytical exercise that assumes an adverse change in one or more of a firm’s funding sources, or a major shock to a company’s core business due to a litigation crisis, competitor’s action, product recall, production plant disaster, financial crisis, or other source of business trauma. The proposed change in funds availability may involve the loss of one or more of a firm’s borrowing facilities, a sudden and large increase in borrowing costs, or both. Such changes may reduce the firm’s credit rating, violate loan covenants, or cause a technical default on a credit facility.
tying
The act of requiring a purchaser to buy one product or service in order to be allowed to buy a second, typically unrelated, product or service.
universal bank
A bank that offers both commercial and investment banking services, with investment banking services offered through the investment banking arm of a commercial bank’s holding company.
account-to-receiver transfer
Under the FedGlobal ACH Payments system, this type of transfer allows funds from accounts at a US depository financial institution to be retrieved by any receiver either at a participating bank location or at a trusted, third-party provider in certain receiving countries.
automated clearinghouse
An electronic network for financial transactions in the United States, capable of processing large volumes of low-value credit and debit transactions in batches.
available balance
A type of bank balance that represents the funds in a customer’s account that the bank was able to invest in income-producing assets during the account analysis period. It is also defined as the amount of funds available for withdrawal from an account, based on the bank’s availability schedule and/or local regulations that require specific availability for certain funds.
certified check
A payment instrument drawn on a depositor’s checking account; funds are withdrawn from the depositor’s account at the time of certification, to assure payment with a certification or guarantee by the bank. It carries the signature of a bank officer certifying the check to be genuine and guaranteeing payment.
charge-back
The reversal of a prior outbound transfer of funds from a consumer’s bank account, line of credit, or credit card.
clearing
The process in which financial institutions use the information contained in a payment instruction, such as a check or wire transfer, to transfer money between themselves on behalf of the payor and the payee, either directly or through some external network.
Clearing House Interbank Payments System (CHIPS)
A large-dollar funds transfer network operated by The Clearing House Payments Company, a bank-owned US company.
clearinghouse
In a payment clearing process, this is a group of banks or other financial institutions (including payment service providers) that agree to exchange payment instruments (paper or electronic) drawn on the member participants.
collected balance
An aggregate of bank account balances that is calculated as the average ledger balance minus the deposit float.
correspondent bank
In a payment clearing process, this is one of two banks that have accounts with each other for the purpose of clearing and settlement of payment items between the banks.
credit transfer
A payment type in which one person or company authorizes a bank or payment service provider to credit a bank account held in the name of another party for a payment or payments that are due.
debit card
A card that allows access to funds directly from a cardholder’s checking or savings deposit account and can be either signature-based or personal identification number (PIN)-based.
departmental card
A variation on the purchasing card in which each department is given its own purchasing card for its general use. Unlike most cards, there is no individual’s name on the card.
deposit deadline
The time within the banking day when an item must be ready for transit at the depository bank’s processing center to qualify for the availability stated in the availability schedule.
Average deposit float
The sum of the daily dollar amount of items in the process of collection (primarily checks), divided by the number of calendar or business days in the account analysis period.
depository bank
The bank or financial institution in which a check is deposited for processing and clearing.
FedGlobal ACH Payments
A service offered by the US Federal Reserve Bank to provide a framework for sending cross-border automated clearinghouse transactions to countries around the world (over 30 countries and territories as of 2022).
Fedwire
A high-value, real-time gross settlement (RTGS) transfer system operated by the US Federal Reserve.
finality
In a payment system, this is the point in time when a payment can no longer be taken back or retracted by a payor or payor’s bank, and the payee has full use of the funds.
foreign check
A check deposited at a bank in one country that is drawn on a bank in another country.
giro
A method of transferring money by instructing a bank to directly transfer funds from one bank account to another without the use of checks. These payments are initiated by the payor and can be one-time payments or can be recurring standing instructions for a series of payments and are the functional equivalent of an automated clearinghouse credit.
government warrant
In government finance, this is an order to pay that instructs a treasurer to pay the holder on demand or after a maturity date.
gross settlement
A type of settlement in a payment system in which each transaction results in a separate value transfer between the payor and payee.
interchange fees
Fees established by the payment card brands that go directly to the issuing bank to cover its costs in issuing cards and in processing card transactions.
ledger balance
A bank balance that reflects all entries to a bank account, regardless of whether the deposited items have been collected and are available for withdrawal.
merchant acquirer
The financial institution that processes and settles payment card transactions on behalf of a seller.
merchant discount
A type of bundled merchant card processing fee in which the merchant is charged one fee by its card processor that covers all of the cost components of the transaction.
MICR line
The machine-readable information on the bottom of a check.
money order
A prepaid instrument issued by various third parties such as banks, postal services, or consumer outlets (e.g., convenience stores and check-cashing agencies), where the purchaser is the instrument’s payor and payment is the obligation of the issuer.
near field communication
A short-range wireless connectivity standard that uses magnetic field induction to enable communication between devices when they are touched together or brought within a few centimeters of each other.
on-us check clearing
A type of check-clearing process that involves a single bank and occurs when a payee deposits a check in an account at the same bank on which it is drawn.
on-we check clearing
A type of check-clearing process that occurs when checks are deposited at a financial institution that are drawn on related financial institutions or on financial institutions that share a common check-processing system, thus eliminating the need to clear the checks through another bank.
optical character recognition
A processing method for data entry that reads preprinted information on remittance documents and creates a digital data file.
payee
In a payment system, the party receiving the payment.
payment system
A series of processes and technologies (i.e., a payment instrument, a clearing channel, and a settlement mechanism) that transfer monetary value from one party to another.
payor
In a payment system, the party making the payment.
pre-authorized draft
A payment instrument that authorizes the payee to draw/draft against the payor’s account.
proof of deposit
An availability assignment method used in banking in which availability is assigned to each check as it is processed.
purchasing card
A payment card, typically a credit card, used by a business for the purchase of supplies, inventory, equipment, and service contracts.
real-time gross settlement system
A type of payment system in which each transaction results in a separate value transfer between the payor and payee, and the payment to the payee is final and irrevocable at the time the receiving bank’s account is credited or at the time the receiving bank is notified of the payment, whichever is earlier.
reject item
A check that is rejected by a bank’s automated check-processing equipment.
remote deposit capture
In an over-the-counter field deposit system, this is a process that allows an organization to scan and image checks, then transmit those images to its depository bank for posting and clearing, instead of having to deposit physical checks.
settlement
In a payment system, this is the actual movement of funds from the payor’s account to the payee’s account.
settlement risk
A form of counterparty credit risk that is related to the probability that a party funding a particular transaction will default on the actual payment or final payment obligation.
sight draft
A draft that is payable upon presentment, provided all of the terms of the draft have been met.
single-use card
A disposable credit card number that looks like a regular credit card number, including an embedded expiration date and security code, but will only work once.
smart card
A typical payment card with the addition of a computer chip with related circuitry that can be used to store information for security or transaction processing.
Society for Worldwide Interbank Financial Telecommunication (SWIFT)
A financial industry-owned, cooperative, interbank telecommunication network that enables banks, nonbank financial institutions, and some corporations to send authenticated electronic messages in standard formats.
stored-value card
A type of debit card that may be offered by financial institutions, retailers, and other service providers, and can be a branded, open-loop card (e.g., Visa or MasterCard), or a private-label, closed-loop card (e.g., Starbucks or other merchant gift card).
time draft
A draft that is payable at some future date, provided all of the terms of the draft have been met.
transit check
A check deposited with a financial institution that is drawn on another financial institution.
value dating
A process whereby a bank sets a forward value date that is the date on which the value of funds is credited to an account, and establishes a back value date that is the date on which the value of funds is debited from an account.
virtual currency
A type of unregulated, digital money that is issued and usually controlled by its developers, and is used and accepted among the members of a specific virtual community.
wire transfer
An electronic payment that is typically processed individually and in real time with immediate and irrevocable settlement.
asset-backed commercial paper
An investment that has most of the features of standard commercial paper, but is secured against specific assets—usually short-term trade receivables from a single company or a range of companies.
bank obligation
A debt instrument issued by a bank to raise funds.
banker’s acceptance
A cross-border financing instrument that can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods.
certificate of deposit
A type of time deposit account that pays the bearer some stated rate of interest (either fixed or variable) over its maturity. It may be issued in any denomination, with maturities generally ranging from one month to five years.
commercial paper
Tradable promissory notes that allow the issuer to raise funds in the short-term money market. In the United States, maturity can range from overnight to 270 days for publicly traded instruments and up to 397 days for private-placement instruments, with most issues maturing in less than 45 days.
default/credit risk
A form of risk that refers to the likelihood that the payments owed to investors will not be made under the original terms.
Depository Trust & Clearing Corporation (DTCC)
An investment-industry-owned corporation that works through its subsidiaries to provide clearing, settlement, and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments, and over-the-counter derivatives.
Eurodollar
A deposit denominated in US dollars held in a financial institution outside of the United States.
floating-rate note
A note with a variable interest rate. The adjustments to the interest rate are made periodically and are tied to a certain money market reference rate.
government paper
A range of short-term promissory notes, generally referred to as Treasury bills or government-issued promissory notes, issued by national, provincial, and local government agencies and authorities, as well as other government entities, in order to raise funds in the short-term money market.
liquidity risk
A type of risk relates to an organization’s ability to raise the necessary cash to meet its obligations as they come due.
mark to market
The accounting act of recording the price or value of a security, portfolio, or account to reflect its current market value rather than its book value.
marketability
A measure of the ability of a security to be bought and sold. Along with maturity, it is one of the primary determinants of liquidity.
money market
The part of the global financial market that deals with financial instruments that are easily converted to cash (i.e., highly liquid) and have very short maturities, typically one year or less.
money market fund
A commingled pool of money market instruments, typically established and managed by financial institutions, in which investors have an ownership interest. The funds may be offered in the domestic currency or, where allowed by local regulators, in a foreign currency.
mortgage-backed security
A type of asset-backed security that uses pools of home loans as the source of cash flows to the investors.
mutual fund
A collective investment vehicle in which multiple investors place cash. The cash is then used to acquire assets (e.g., stocks, bonds, government instruments) in the name of the investment vehicle.
net asset value
A value that represents the price per share of a mutual fund or an exchange-traded fund. It is generally calculated as the total value of all the securities or assets in the fund (less any liabilities), divided by the number of shares outstanding.
repurchase agreement
An agreement in which a bank or securities dealer sells a security it owns (usually government debt) to an investor and agrees to repurchase it at a later date and at a slightly higher price.
standby letter of credit
A variation of a commercial line of credit in which the bank providing the instrument agrees to make payment in the event that its customer cannot.
Treasury bill
A short-term debt obligation backed by the issuing government with a maturity of less than one year.
yield
The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value, or its face value.
additional paid-in capital
An equity account that reflects the difference at the time of issue between the par value and the issuance price (less underwriting costs) of any new stock sold by a company.
asset-backed security
A investment vehicle with income derived from a pool of assets, such as accounts receivable or credit card receivables.
bond indenture
The contract between the issuing entity of a bond and the bondholders.
book value per share
The book value of total common stockholders’ equity divided by the number of common shares outstanding.
call provision
A bond provision that gives the issuing entity the right to redeem the bond or other issue prior to the original maturity.
capital investment
Funds used by a business to purchase long-term, typically fixed assets, such as land, machinery, or buildings.
capital market
A market in which individuals and institutions trade financial securities with maturities in excess of one year.
collateral
Assets used as security for a loan or bond issue. They may include physical assets (e.g., plant, equipment, and inventory) or financial assets (e.g., receivables and marketable securities).
collateral trust bond
A type of bond backed by securities of other companies that are owned by the firm issuing the bond.
comfort letter
A letter from another party stating actions that it will or will not take on behalf of a borrower. This type of agreement is not technically a guarantee and is not legally enforceable.
common stock
A security that represents ownership in a company.
cost of capital
A measure of the expense a company would incur to raise funds to make investments in assets.
covenant
An additional requirement that is placed on debt or bond issues and that imposes constraints on the actions of the company’s management.
credit enhancement
An addition to a borrowing arrangement or debt securities issue meant to improve the overall credit rating on the loan or issue. It generally provides either a guarantee of payment in the event of default or an agreement to provide financing to roll over the debt issue.
cure period
A period of time, often specified in a loan agreement, in which an event of default may be corrected before the lender may pursue default remedies.
custodian
A third party that typically takes possession of securities, receives delivery or book entry of principal and interest payments, performs record keeping, and provides maintenance services for an investment portfolio.
debentures
Unsecured bonds that represent general claims against the issuer organization’s assets and/or cash flows.
debt indenture
A legal document that outlines the rights and obligations of the borrower (bond issuer) and lender (bondholder). It is a contract between the issuing company and the bondholders, which includes various restrictive covenants that impose constraints on the actions of the company’s management.
debt market
A financial exchange in which participants can issue new debt, or buy and sell debt securities.
defeasance of debt
A financial management method that removes debt from an organization’s balance sheet without actually retiring the debt issue. In this arrangement, the borrower places sufficient funds in escrow, usually in government securities, to pay for interest and principal on the debt issue. Because control of both the debt and escrow funds is relinquished, and payment and retirement of the debt issue is now guaranteed, this debt and the related securities can be removed from the balance sheet and do not need to be considered in relation to any restrictive covenants the organization may have regarding debt.
depositary receipt
A type of negotiable financial instrument (typically an equity security) that trades on a local exchange but actually represents stock ownership in a foreign, publicly listed company.
economic development bond
A type of bond typically issued by a developing country or sponsoring organization for the express purpose of fostering infrastructure projects and related construction.
equipment trust certificate
A type of bond that is secured by movable equipment (e.g., an aircraft, a fleet of trucks, or railroad equipment). Each certificate is backed by a specific asset or group of assets (i.e., there is no blanket lien securing the issue).
equity market
An exchange where shares in companies are issued and traded, consisting of both primary and secondary markets.
equity securities
Stock that represents the ownership of publicly owned corporations.
Eurobond
A type of bond sold simultaneously in many countries outside the country of the borrower and denominated in a currency other than that of the country in which it is issued.
event of default
An action or circumstance by which a borrower breaches or violates any term or condition under a debt agreement.
firm value
An economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common).
floating-rate debt
A type of debt issue that carries interest payments that reset periodically based on movement in a representative interest rate index.
foreign bond
A type of bond sold in a particular country by a foreign borrower, but usually denominated in the domestic currency of the country where issued. These bonds are primarily regulated by the authorities in the country of issue.
full guarantee
A level of guarantee for a subsidiary in which the guaranteeing party agrees to take over the loan if the subsidiary fails to make timely payments.
government-sponsored enterprise
A company that is created by a national government in order to participate in or help support various commercial activities on the government’s behalf. These organizations are generally formed for a specific purpose and are designed to support a certain economic sector.
green bond
A type of bond that designates proceeds for environmental projects, renewable energy projects, or making buildings more energy efficient.
high-yield bond
A bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds, and municipal bonds. Because of the higher risk of default, these bonds pay a higher level of interest.
hybrid security
A type of security that is generally created by combining the elements of two or more different types of securities into one.
income bond
A type of bond that pays interest only if a company has profits, thus reducing some of the risk of issuing debt from a company’s viewpoint.
index bond
A type of bond that has interest rates tied to an economic indicator.
initial public offering
The first sale of stock by a private company to the public.
intermediate-term note
A note with a maturity of two to ten years.
investment banker
A professional who is responsible for assisting issuers in the design and placement of securities issuances.
lead bank
The financial institution that is responsible for managing a syndicated loan or securities sale that is funded by multiple financial institutions.
lien
A legal claim on an asset or assets.
long-term bond
A bond with a maturity of greater than 10 years.
material adverse change clause
A stipulation in a loan agreement that allows a lender to refuse funding or declare a borrower to be in default, even if all agreements are in full compliance, if the lender believes a negative change has occurred in the borrower’s condition.
maturity matching
A practice that involves matching the life of a debt issue to the life of the specific assets financed or matching the due date of an investment to the future need for funds.
mortgage bond
A type of bond used to finance specific assets, such as real estate, that are pledged as security against the issue.
multicurrency bond
A type of debt instrument that is usually issued with (1) a currency option that allows investors to choose among several predetermined currencies, or (2) a currency basket that is denominated in a set of standard currencies.
municipal bond
A sub-sovereign bond issued by a smaller governmental entity, typically in the United States and usually in the form of a general obligation or revenue bond.
off-balance-sheet financing
A type of arrangement designed to provide financing that does not appear on the borrowing company’s balance sheet.
operating lease
A type of lease that is established so that the lessor retains ownership of the leased assets at the end of the lease period.
origination
An investment bank function that involves consultation with a company raising funds about the characteristics of a securities issue and any underlying documents.
origination desk
A subset of trading professionals who are charged with evaluating, pricing, and managing the placement of new securities issues.
personal guarantee
A type of guarantee in which a lender may require a pledge on the part of the owner or other principals in a business before granting a loan to the business.
pledge
A binding promise in which a borrower offers collateral to a lender as security, usually in return for a loan.
political risk
A term applied to a variety of actions that a government may take that negatively impact a company’s operations and/or value.
preferred stock
An investment security that is a type of equity, but is different from common stock in terms of its investor rights and dividend payment streams. In terms of cash flows, it is more like debt than equity because of its fixed dividend payments. Unlike with debt, however, a company does not risk bankruptcy by missing a payment.
primary market
A financial exchange that offers newly issued debt and equity securities to investors when firms or government units sell securities to raise funds.
private market
A financial exchange for direct placement, in which securities are offered and sold to a limited number of investors, and not offered to the general public.
put provision
A condition that allows a bondholder to resell a bond back to the issuer at a preestablished price on certain stipulated dates prior to maturity.
credit rating agency
A company that assigns ratings that, in its opinion, rate a debtor’s likelihood of default.
representations
Along with warranties, these are the existing conditions attested to by the borrower at the time when the loan agreement is executed, on drawdown (i.e., when borrowed funds are received), and with each quarterly reporting requirement.
seasoned equity offering
A type of stock offering in which new stock shares are sold by a company that has shares already trading on an exchange or in the over-the-counter market.
secondary market
A financial exchange that trades previously issued securities.
securitization
The practice of pooling various debt contracts, such as consumer loans, credit card debt, and mortgages, and using them as a basis for issuing securities.
sinking fund
Arrangements for the orderly repayment of debt principal, which might include the regular setting aside of funds so that the size of the fund equals the debt principal by the maturity date.
Secured Overnight Financing Rate
Published daily by the Federal Reserve Bank of New York, the rate has been designated as the preferred risk-free reference rate to replace LIBOR for USD-denominated transactions.
sovereign bond
A bond issued by a national government and typically denominated in the currency of the issuing government.
special drawing right
An artificial currency, created by the International Monetary Fund, whose asset value is based on a basket of currencies consisting of the Chinese yuan, euro, Japanese yen, British pound sterling, and US dollar.
special purpose acquisition company
A company that raises capital via an initial public offering (IPO) for future acquisitions. Any raised funds are placed in trust to be used to purchase stock in already established companies.
specific-project guarantee
A type of loan guarantee in which the guaranteeing party backs only loans relating to specific projects of the subsidiary.
syndicate
In investment banking terms, this is a group of banks or brokerage firms that work together, typically to underwrite a securities issue or arrange a loan.
tender option bond
A type of bond that allows the holder to redeem the bond either once during its life or on specified dates. Redemption is usually at par value.
term loan
A type of lending arrangement with a fixed maturity, usually greater than one year, that can be repaid either in installments or in a single payment.
term note
A medium- or intermediate-term debt instrument, typically with terms from two to ten years, issued by an organization.
tracking stock
A special type of share created by a parent company to track the financial progress of a particular line of business.
treasury stock
Shares issued by a company and later reacquired.
underwriting
An investment bank function, this is the act of purchasing all or a part of a block of securities issued by a company and thereby becoming responsible for their ultimate distribution.
warrant
A company-issued option that gives the holder the right to buy a stated number of shares of stock at a specified price for a specified period of time.
warranties
Along with representations, these are the existing conditions attested to by the borrower at the time when a loan agreement is executed, on drawdown (i.e., when borrowed funds are received), and with each quarterly reporting requirement.
zero-coupon bond
A debt security that does not pay interest but is issued, and traded, at a deep discount, rendering a profit at maturity when the bond is redeemed for its full face value.
account analysis
Largely unique to the US banking system, this is a record of the services provided to the customers of a bank, along with detailed information on balances and credits earned for those balances.
account resolution
Usually made at the board of director’s level, this is the basic authorization empowering a representative of the business to enter into agreements for financial services. It usually specifies the functions that can be performed by specific individuals or job titles, the persons authorized to open and close accounts, and the entire scope and limitations of the relationship.
blocked currencies
The practice of a government not allowing the conversion from the local currency into a major trading currency.
certificate of incumbency
A document (signed by an enterprise’s corporate secretary) confirming the authority of a corporate officer to perform certain actions on behalf of the enterprise.
counterparty risk
The risk that the other party in a contract or financial transaction will not perform as promised.
current account
A bank depository account that is both a store of value (deposits) and, perhaps more importantly for treasury management purposes, a vehicle through which an account holder uses a bank to transfer funds to, and receive deposits from, a third party.
customer identification program
The processes used by a financial institution to verify and validate the stated identity of a customer.
earnings credit allowance
The total dollar value of imputed interest that can be used by a company to offset the bank service charges incurred during the account analysis period.
excess balance
A situation that occurs in an account when its average collected balance is greater than either the amount that the financial institution requires as a compensating balance or the target level that a company has chosen to maintain.
expropriation
A government takeover of property, with or without compensation.
forced reinvestment
A type of political risk in which funds cannot be transferred out of a country in any form, or the amount that can be transferred is limited.
Foreign Corrupt Practices Act (FCPA)
US legislation that specifically prohibits payments to foreign officials or their family members for the purpose of gaining any improper business advantage.
International Bank Account Number
An international standard for identifying bank accounts across national borders.
know your customer
The due diligence procedures that a financial institution must follow to determine or verify the identity of its customers.
layering
The attempt to conceal the source of ownership of money by creating a complex series of transactions in order to provide anonymity.
money market deposit account
A type of deposit account that pays an unregulated rate of interest determined by individual institutions.
nationalization
A government takeover of a company.
nonresident account
An account with a global financial institution that is owned by an individual who is a resident of a country that differs from where the global financial institution is chartered.
Red Flags Rule
US regulations requiring financial institutions and creditors to develop and implement written identity theft prevention programs that provide for the identification of, detection of, and response to patterns, practices, or specific activities that could indicate identity theft.
request for information
A document requesting a response about a vendor’s interest in providing, and ability to provide, services.
request for proposal
A formal document prepared by a sourcing company that outlines objectives, needs, and service requirements and may be used to obtain bids for anything ranging from one specific service to a company’s entire relationship.
request for quote
A document whose purpose is to invite suppliers into a bidding process on specific products or services. It is best suited to products and services that are essentially standardized and/or commoditized.
required majority ownership
A type of political risk in which a government requires that companies must be owned by resident nationals.
scorecard
A management tool used by a company to qualitatively and quantitatively measure a service provider’s performance.
service agreement
A legal document that describes the requirements and expectations of both the purchaser and provider of a specific service or services.
service charge
An explicit fee or price levied for service(s) provided by a financial institution.
service level agreement
A document that specifies the level of service expected from a vendor such as a financial service provider, along with a description of any penalties for failure to comply with the requirements of the agreement.
sovereign risk
The risk that a government may default on its debt.
time deposit account
A depository account that must be maintained at a financial institution for a contractually specified period of time. Early withdrawal is allowed only with prior notification.
accrual accounting
The accounting approach under which expenses must be reported when the revenues with which they are associated are recognized. Long-lived or fixed assets are capitalized (i.e., recorded as assets on the balance sheet) and depreciated over time because they produce revenues over many accounting periods. This practice matches an asset’s cost to the revenues it produces.
accumulated depreciation
An asset account that records the amount of depreciation previously expensed on a company’s assets. It appears on the asset side of the balance sheet, but it is a source of funds when it increases.
cash basis accounting
A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or disbursed.
cost of goods sold
The expense associated with providing the goods or services whose sale is recognized as revenues.
current assets
A term that generally refers to assets that are expected to be converted into cash within one year.
current liabilities
A term that generally refers to liabilities that are required to be paid for within one year.
derivative
A financial product that acquires its value by inference through a formulaic connection to another asset. The other asset is termed the underlying asset, and can be a financial instrument (e.g., a stock or bond), currency, or commodity.
earnings before interest and taxes (EBIT)
A measure of operating income or profit that is calculated as gross profit less operating expenses, depreciation, and amortization.
earnings before interest, taxes, depreciation, and amortization (EBITDA)
A measure of operating profitability that is calculated as gross profit less operating expenses (but not subtracting depreciation and amortization).
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database
A database that contains a searchable listing of US Securities and Exchange Commission (SEC) filings for public companies.
fair value
Under Accounting Standards Codification (ASC) Topic 820, the value of an asset or liability is defined by determining the price that would be received in an asset sale or the price paid to transfer a liability. The valuation price must be market-based and take into consideration all observable valuation inputs, such as competition and risk.
fair value hedge
A type of hedge in which the risk being hedged is a change in the value of an asset or a liability.
Financial Accounting Standards Board (FASB)
An independent, self-regulating US organization, formed in 1973 and made up of accounting professionals, that establishes financial accounting and reporting standards in the United States, collectively referred to as Generally Accepted Accounting Principles (US GAAP).
financial statements
Accounting reports that summarize a company’s operating results and its financial position at a point in time.
foreign currency translation
A process used to convert the financial results of a parent company’s foreign subsidiaries to its reporting currency.
functional currency
For determining foreign exchange translation exposure, this is the currency of the primary economic environment in which the entity operates.
goodwill
An account that can be found in the assets portion of a company’s balance sheet and often arises when one company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm’s intangible assets.
home currency
The currency of the country in which an entity’s headquarters are located.
income statement
A financial statement that summarizes revenues earned, expenses incurred, and other income and expenses, including foreign exchange gains and losses, interest income and expenses, and other nonoperating income and expenses over an accounting period.
intangible assets
Assets that lack physical substance and for which there is often a high degree of uncertainty concerning their future value.
net investment hedge
A type of hedge designed to hedge currency risk associated with a company’s investment in a foreign operation.
realized gains/losses
Gains or losses that are earned when a transaction that was previously recorded in the financial statements is completed.
retained earnings
A balance sheet account that represents the accumulated net earnings of a corporation since its inception, less dividends paid to shareholders.
statement of cash flows
A financial statement that provides a detailed picture of the sources of a company’s cash and how these sources are used.
unrealized gains/losses
Gains or losses that are recorded in the financial statements without an associated cash flow.
breakeven analysis
A type of cost/benefit analysis that establishes the level of activity at which benefits and costs are equal.
capital budgeting
The process by which proposed large-dollar investments in long-term assets are evaluated.
cash conversion efficiency
An efficiency/asset management ratio that measures how effectively a company has converted sales (or revenues) into cash. It is computed as cash flow from operations divided by revenues.
common-size financial statement
A financial statement analysis technique that involves stating line items as percentages rather than amounts.
coverage ratio
A type of financial ratio concerned primarily with measuring a company’s ability to make payments on (i.e., service) its debt.
current asset turnover ratio
An efficiency/asset management ratio that measures how many times the firm has turned over the stock of its most liquid assets with the flow of revenue. It is computed as revenues divided by current assets.
debt management ratio
A type of ratio that measures the firm’s degree of indebtedness and its ability to service its debt.
debt to tangible net worth ratio
A type of debt management ratio that reflects the impact of intangible assets (e.g., goodwill, patents, trademarks, and copyrights) on the balance sheet. It is computed as total debt divided by total equity minus intangible assets.
DuPont approach
An integrated ratio analysis technique that looks at the return on equity as a relationship among an organization’s net profit margin, asset management, and financial leverage.
EBITDA margin
A measure of operating profitability calculated by dividing EBITDA (earnings before interest, taxes, depreciation, and amortization) by total revenues.
economic value added
A performance measurement ratio that isolates the funds available to all suppliers of capital and then relates that total to the amount of capital supplied. It can be computed as earnings before interest and taxes (EBIT) times one minus the company’s tax rate, and then subtracting the product of the weighted average cost of capital (WACC) and long-term debt and equity.
efficiency/asset management ratio
A type of ratio that measures how effectively assets are utilized.
equity capital
The total amount of money raised by a company by issuing securities to shareholders.
financial budget
A component of a master budget, this budget addresses an organization’s financing and investing activities.
financial leverage
A concept that examines the fixed costs of financing.
fixed asset turnover ratio
An efficiency/asset management ratio that measures how efficiently fixed assets (or property, plant, and equipment) are used. It is computed as revenues divided by net property, plant, and equipment.
fixed cost
A type of cost that does not vary in total over a wide range of activity or time period, and is not immediately impacted by changes in business activities.
fixed-charge coverage ratio
A coverage ratio that is similar to the times interest earned (TIE) ratio but also takes into account fixed charges other than interest, such as payments on leases. It is computed as earnings before interest and taxes (EBIT) plus fixed charges, divided by interest expense plus fixed charges.
flotation costs
The costs of issuing a security (usually the underwriting costs), not related to direct interest or equity costs.
free cash flow
A measurement of the amount of cash generated during a period that is available to shareholders and creditors. It adjusts net income for noncash charges (i.e., depreciation and amortization), working capital, and capital expenditures, and is considered a fundamental component of assessing firm value.
future value
For an investment made today, this is the expected value of the investment at a specified, future date.
gross profit margin
A performance ratio that shows the percentage of revenues remaining after the cost of goods sold is deducted from revenue. It is computed as gross profit divided by revenues.
hurdle rate
A predetermined required rate of return used by companies to decide whether to invest in a project.
debt ratio
A ratio used to measure the level of indebtedness or use of leverage by a company.
internal rate of return
The discount rate that makes the net present value equal to zero or, equivalently, makes the present value (PV) of cash inflows equal to the PV of cash outflows.
liquidity ratio
A type of ratio that measures a firm’s ability to meet its payment obligations on short-term debt and helps ascertain whether cash is being used effectively.
long-term debt to capital ratio
A type of debt management ratio that measures the percentage of a company’s capital (where capital is defined as the sum of long-term debt and equity) that is provided by long-term debt. It is computed as long-term debt divided by long-term debt plus equity.
master budget
An annual budget for an entire organization that has two chief components: (1) the operating budget or profit plan, and (2) the financial budget.
net present value
A type of financial analysis, this value is calculated by netting the present value (PV) of anticipated cash inflows with the PV of cash outflows.
net profit margin
A performance ratio that shows the percentage of profits earned after all expenses and taxes are deducted from revenues. It is defined as net income divided by revenues.
operating budget
A component of a master budget, this budget focuses on day-to-day operations.
operating leverage
A concept that examines the responsiveness of operating profits to changes in sales. It is determined by the extent to which fixed costs are used in a company’s operating cost structure.
operating profit margin
A performance ratio that shows the percentage of revenue remaining after both the cost of goods sold and all operating expenses are deducted from revenue. It is computed as earnings before interest and taxes (EBIT) divided by revenues.
opportunity cost
The value of the best known alternative not taken when two or more mutually exclusive alternatives are available.
payback period
The number of years required to recover the initial investment in an asset or project.
present value
The value at the present time (or discounted value) of anticipated future cash flows or payments.
profitability index
A cost/benefit measurement that is similar to net present value, it is a ratio of the present value gained to the cost required to obtain that value. It shows value gained per dollar of investment and is calculated as present value of cash inflows divided by present value of cash outflows.
return on assets
A performance ratio that measures net income in relation to the investment in assets. A greater value for this ratio implies a larger net income generated per dollar invested in assets. It is computed as net income divided by total assets.
return on common equity
A performance ratio that measures the amount of earnings available to common shareholders relative to the level of their investment in the company. It is computed as earnings available to common shareholders divided by common equity.
return on invested capital
A performance measurement ratio that calculates profit per dollar of invested capital. It is computed by dividing net income by invested capital (or long-term debt and equity).
risk-adjusted discount rate
A type of cost/benefit analysis that essentially requires high-risk endeavors to earn a higher rate of return in order to justify the investment.
risk-adjusted return on capital
A method of determining the economic value of a transaction or activity based upon the anticipated risk-adjusted performance of the activity.
scenario analysis
A method for assessing investment risk, this type of what-if analysis assesses possible outcomes under a range of circumstances. It is frequently used to establish the lower bound (i.e., worst case) and upper bound (i.e., best case) of outcomes.
sensitivity analysis
A method of assessing investment risk, this type of analysis determines how a final outcome, such as net present value, is influenced by changes in the value of a particular variable (e.g., sales, or an operating or financing cost) and how vulnerable the expected outcome is to changes in a specific assumption.
simulation
A method of assessing investment risk, this method combines aspects of scenario and sensitivity analyses, allowing certain assumptions in a decision model to fluctuate simultaneously.
step-up cost
A type of cost that is fixed over a wide range of activity, but once output reaches a certain level, requires additional fixed costs to facilitate an increased level of output.
time value of money
A fundamental finance principle that establishes the relationship between cash flows received at different times. For example, a dollar received today is worth more than a dollar received tomorrow because today’s dollar can be invested to earn a return.
times interest earned ratio
A coverage ratio that measures a firm’s ability to service its debt through interest payments. It is computed as operating income (i.e., earnings before interest and taxes, or EBIT) divided by interest expense.
total liabilities to total assets ratio
A type of debt management ratio that measures the percentage of all liabilities to total investments or total assets. It is computed as total liabilities divided by total assets.
variable cost
A type of cost whose total amount changes in direct proportion to the level of business activity (e.g., sales or production).
weighted average cost of capital
Used in determining the overall cost of capital, this cost is calculated by weighting the costs of the primary funding sources of permanent capital by their proportionate dollar contribution to the firm’s capital base.
aggressive financing strategy
A current asset financing strategy that involves a company financing all fixed assets with long-term debt and equity, but financing only a portion of permanent current assets with long-term financing. Short-term financing supports the remainder of the permanent current assets and all fluctuating current assets.
asset-based lending
A type of lending that involves commercial loans or lines of credit that are backed by liens on specific assets of the borrowing company. It is typically secured by accounts receivable or inventory, and can support temporary financing needs.
availability float
The time interval or delay between the day when a payment is deposited into a bank account and the day when the payee’s account is credited with collected funds.
balance-forward system
A cash application process (most commonly used in consumer transactions) in which payments are applied to the total outstanding balance on an accounts receivable account rather than to specific items. The remaining balance, if any, is then carried forward to the next billing cycle.
bilateral netting system
A type of netting system in which purchases between two subsidiaries of the same company are periodically netted against each other so that only the net difference is transferred.
cash conversion cycle
In working capital management, this formula explains and calculates how much time elapses from when funds are disbursed in direct support of a revenue-generating activity until the time when funds are recovered from revenues. It is calculated as days receivables plus days inventory minus days payables.
cash flow to total debt ratio
A ratio that measures the liquidity of a company as a function of cash flow and the level of total debt. It is calculated as net income plus depreciation (and other noncash expenses, such as amortization and depreciation), divided by total long- and short-term debt.
cash on delivery
A term of sale whereby the seller ships the goods and the buyer pays upon receipt. If the buyer refuses to pay, the goods are returned and the seller must pay the shipping and handling costs.
cash terms
A term of sale whereby the buyer generally has 7 to 10 days to make payment.
cash turnover
A ratio that indicates the number of cash cycles a firm experiences in a period (typically a year), and is generally defined as the days in the period (365 for a year) divided by the cash conversion cycle.
collection float
The time interval or delay between the time the buyer/payor initiates payment and the time the seller/payee receives good funds; it consists of mail float, processing float, and availability float.
conditions
As part of the five Cs of credit, this factor assesses the general, existing macroeconomic environment that impacts a borrower’s ability to pay or the willingness of a lender to grant credit.
conservative financing strategy
A current asset financing strategy that involves using long-term financing (i.e., debt and equity) to finance fixed assets, permanent current assets, and some portion of fluctuating current assets. Short-term financing is used for the remainder of the fluctuating current assets.
consignment
A term of sale whereby the supplier ships goods to another party who has no obligation to pay until the goods have been sold.
days inventory
In the cash conversion cycle, this is the average number of days that elapse from the purchase of raw materials until the sale of finished goods.
days payables
In the cash conversion cycle, this is the average number of days between the purchase/receipt of materials, supplies, or services, and the issuance of payment for them.
days receivables
In the cash conversion cycle, this is the average number of days required to collect on credit.
disbursement float
The time interval or delay between the day when a payment is initiated and the day when funds are debited from the payor’s account.
discount terms
A term of sale whereby the seller offers a reduction on the total amount owed if paid in full prior to the net due date. Terms of 2/10 net 30 mean that the total amount is due within 30 days of the invoice date, but the buyer can take a 2% discount if it pays within 10 days.
export credit agency
The general term for an entity that provides companies with financing and insurance products to support the exporting of goods, especially into emerging markets.
export financing
Government support of export activities through export loans, credit guarantees, or a combination of both.
Export-Import Bank of the United States
The official export credit agency of the United States.
factoring
An accounts receivable (A/R) financing process that involves the outright sale of receivables to a company that specializes in the financing and management of receivables. The sale may be performed on a with or without recourse basis.
finished goods
A type of inventory that consists of completed items or materials available for sale. It lets a company fill orders when received rather than depend upon product completion to satisfy customer demands.
five Cs of credit
A credit analysis process that considers the character, capacity, capital, collateral, and conditions of the potential borrower.
float
The time interval or delay between the start and the completion of a specific phase or process occurring along the cash flow timeline.
floor planning
In inventory financing, this is a type of asset-based lending used for high-value durable goods, such as automobiles, trucks, or heavy equipment. Loans are made against each individual item, are recorded by serial number, and are not fully repaid until the item is sold.
indirect purchases
Purchases of stores and supplies inventories, which are not used directly in a manufacturing/production process. Rather, they support the production process.
in-house banking
The practice of having treasury become the main provider of banking services for all the company’s operating entities.
installment credit
A form of credit extension that requires a customer to make equal periodic payments, each of which contains principal and interest components.
invoice discounting
An accounts receivable (A/R) financing process that involves the sale of invoices to a discounter, although the seller retains control of A/R management.
invoicing float
The time interval or delay between the day that a customer places an order and the day that the customer actually receives an invoice for that order that can be processed for payment.
just-in-time inventory
An inventory management approach that attempts to minimize inventory levels by reducing the costs or uncertainties that underlie the motives for holding inventory.
lagging
The executing of payments between subsidiaries after the scheduled payment date.
leading
The executing of payments between subsidiaries before the scheduled payment date.
mail float
The time interval or delay between the day a payment (and any related remittance information) is mailed and the day it is received by a payee or at a payee’s processing site.
matching
An internal control method that involves the pairing of an invoice to the original purchase order to help confirm that the order was placed and that the invoice complies with the agreed terms. A further pairing against receiving records ensures the order was fulfilled.
maturity-matching financing strategy
A current asset financing strategy that involves using long-term financing (i.e., debt and equity) to finance permanent current assets and fixed assets. Short-term financing is used to finance fluctuating current assets.
multicurrency account
A special arrangement between a bank (or payment service provider) and a company, in which the bank lets the customer receive or make payments in a range of currencies from a single account or multiple subsidiary accounts.
multilateral netting system
A type of netting system that involves more than two subsidiaries. Each subsidiary informs a central treasury management center of all planned intercompany (usually cross-border) payments through an electronic system.
net terms
A term of sale whereby the seller specifies a net due date by which the buyer must pay in full.
open account credit
A form of credit extension that is the most common type of commercial trade credit. A seller issues an invoice as formal evidence of the obligation and records the sale as an account receivable. The buyer is billed for each transaction by an invoice and/or monthly statement. Full payment of invoiced amounts is expected within the specified credit terms unless certain discounts or deductions are available to the buyer. A buyer’s creditworthiness is reviewed periodically, but the buyer does not need to apply for credit each time it places an order.
open item system
A cash application process most commonly used in business-to-business sales. Each invoice sent to a customer is recorded in the accounts receivable file. When a payment is received, it is matched with the specific invoices being paid. Any payment discrepancies are noted (e.g., discounts, allowances, adjustments, or returns).
order-to-cash timeline
The process or steps involved in converting orders or sales of goods into cash or good funds in the merchant’s bank account.
payment float
The time interval or delay between the day that a bill or invoice is sent/received (depending on the perspective of the seller or buyer) and the day that payment is actually credited to the biller’s bank account.
processing float
The time interval or delay between the time the payee or the payee’s processing site receives the payment and the time the payment (typically a check) is deposited into the payee’s account.
quantitative credit analysis
A type of credit analysis that begins with an investigation of the applicant’s financial statements, usually using ratio analysis. Liquidity and working capital ratios, debt management and coverage ratios, and profitability measures are most often included.
recourse
A term related to using a factoring arrangement. In this case, the seller is liable for any bad debts the factor cannot collect.
re-invoicing
An intercompany method of centralizing the responsibility for monitoring and collecting international accounts receivable to more effectively manage related foreign exchange exposures.
relaxed current asset investment strategy
A current asset management strategy in which a company maintains high levels of current assets relative to sales. A large investment in current assets is likely to lower investment returns, but the firm operates with less short-term operational risk because of its larger liquid asset balances.
revolving credit
A form of credit extension whereby a company grants credit without requiring specific transaction approval, as long as the account remains current.
seasonal dating
A term of sale whereby the seller agrees to accept payment at the end of the buyer’s selling season.
short-term financing
A financing strategy used to meet temporary cash needs for periods of one year or less.
supplier-managed replenishment program
An inventory management process whereby the supplier maintains and tracks the inventory of materials it provides to a customer. Title to the product is transferred at the shipping dock.
supply chain finance
A finance method that is effectively a form of reverse factoring, in which an organization uses its relatively stronger credit rating to allow its suppliers to finance their receivables.
trade credit
A form of credit that arises when a buyer receives goods but payment is not made to the supplier until some later date.
without recourse
A term related to using a factoring arrangement. In this case, the factor must absorb the loss if a customer fails to pay.
work in progress
A type of inventory that represents items or materials that are in the process of being manufactured.
accounts receivable balance pattern
A forecasting tool that specifies the percentage of credit sales during a time period (e.g., one month) that remain outstanding at the end of the current time period and each subsequent time period.
aging schedule
A schedule that separates accounts receivable (A/R) into current and past-due receivables using set periods (typically 30-day increments) and is used for measuring A/R.
current ratio
A ratio defined as total current assets divided by total current liabilities. It is therefore the ratio of cash and assets expected to become cash in one year or less, to short-term liabilities that must be paid in one year or less.
days cash held
A measure of a firm’s liquidity that shows how long a firm can continue to pay operating expenses without any additional revenue.
days sales outstanding
The average number of days required to convert a credit sale into a cash inflow.
net working capital
A working capital metric that is defined as current assets less current liabilities. It is not a ratio, it is an absolute measure of the dollar amount by which current assets exceed current liabilities.
quick ratio
A liquidity ratio that is calculated as cash plus short-term investments and accounts receivable, divided by total current liabilities. It is a more stringent measure of liquidity than the current ratio, as it excludes inventory (due to its lower liquidity) and prepaid expenses (which have little to no likelihood of converting to cash).
acceptance
A drawee’s signed agreement to pay a negotiable instrument (typically a letter of credit or related draft) as presented.
advising bank
In a letter of credit (L/C) transaction, this is the bank that advises the seller of an L/C in its favor.
bank overlay structure
A type of pooling structure that combines both sweeping and pooling. It is typically used when a company’s primary bank has branches in several countries, but the branches do not provide a full range of domestic banking services. A local bank is used to provide collection and disbursement transactions and accounts, and to sweep surplus funds to the primary bank. The primary bank then notionally pools or physically transfers cash balances in overlay accounts, providing a multi-country solution.
barter
A trade payment method that involves the direct exchange of goods or services between two parties without the exchange of money. It is most frequently used when funds cannot be repatriated due to currency controls or other legal limitations.
cash concentration system
A system typically used to transfer funds from outlying depository locations (often at different banks, and sometimes in different countries) to a central bank account at a company’s primary bank. These systems are used in situations where companies may have to deal with a number of separate banks in disbursed geographic locations.
check conversion
The process of converting a paper check to an electronic form, typically an automated clearinghouse (ACH) debit.
collection letter
A document in a documentary collection process that specifies the exact procedures to be followed before shipping documents are released to the importer.
commercial letter of credit
A letter of credit that is issued by a bank as the intended mechanism of payment in relation to a trade transaction involving the domestic or international shipment of merchandise.
concentration account
An account used by an organization to receive funds from collection accounts or to provide funding for disbursement accounts.
controlled disbursement
A bank service (unique to the United States) that provides same-day notification to a company of the amount of checks that will clear against its disbursement account on a given day. The account is typically not funded each day until after the daily notification is received.
countertrade
A trade payment method used by companies that do not have access to sufficient hard currencies to pay for imports from other countries. As an example, an exporter ships merchandise to the countertrading country. In exchange, it takes merchandise that may be sold elsewhere in the world.
documentary collection
A trade payment mechanism that processes the collection of a draft and accompanying shipping documents through international correspondent banks. Instructions regarding the transaction specifics are contained in a collection letter that accompanies the documentation. It is the responsibility of the exporter (i.e., the seller) to determine the instructions specified in the collection letter.
dollar-days
A unit of measurement that reflects both a transaction’s dollar amount and the number of days of float delay.
Electronic Federal Tax Payment System (EFTPS)
A system that serves as the primary method for collecting and accounting for US federal taxes withheld by employers from individuals’ salaries and wages, as well as corporate business, sales, and excise taxes.
electronic invoice presentment and payment
A system for integrating the billing and payment processes, thereby enabling companies to send electronic statements and receive electronic remittances from customers.
electronic lockbox
A variation of the lockbox approach that provides a single collection point for all automated clearinghouse (ACH) and wire payments for organizations with a large number of electronic funds transfer (EFT) collections. It can also process electronic remittance information.
float-neutral terms
Sales terms offered for electronic payment in which either the timing (i.e., value date) of a payment is adjusted or a discount is offered so as to maintain whatever float the buyer was receiving with the paper payment.
freight payment services
An outsourced form of accounts payable wherein specialists pay all of a shipper’s freight bills, audit bills for possible overcharges and duplicate payments, and provide reports that help a company compare costs for different routes and carriers.
hybrid lockbox
A lockbox system that combines features of both wholesale and retail lockboxes.
issuing bank
In a letter of credit (L/C) transaction, this is the buyer’s (importer’s) bank that issues the L/C in favor of the seller (exporter).
letter of credit
A promise by the issuing bank to pay a certain amount under specific circumstances.
lockbox system
A collection tool in which a financial institution or third-party vendor receives mailed payments at specified post office box addresses, processes the remittances, and credits the payments into a payee’s account.
merchant services
The term typically used to describe the products offered by a bank, internet service provider, or other firm that processes credit and debit card transactions.
negotiating bank
In a letter of credit (L/C) transaction, this is the bank that examines the documents presented by the beneficiary, receives payment from the issuing bank, and pays the beneficiary.
non-repetitive wire
A type of wire transfer where both the debit and credit parties can be changed for each transaction. As a result, additional security measures are typically required.
notional pooling
A type of cash concentration that does not require the physical movement of cash. Instead pooling is accomplished by making balancing entries on a set of virtual accounts with no changes to the bank accounts held by company entities.
physical pooling
A type of cash concentration in which funds in a company’s separate bank accounts are automatically transferred to/from a concentration account in order to eliminate idle cash and fund cash outflows. The participating entities are either in surplus or deficit from a transactional perspective, but the bank accounts themselves have a balance of zero.
pooling
A liquidity management technique that enables a company to combine balances from different company bank accounts.
remitting bank
In a documentary collection process, this is the bank of the seller/exporter. It receives the collection documents from the seller.
retail lockbox
A lockbox system used primarily to process machine-readable, high-volume, small-dollar consumer-to-business remittances, such as utility and credit card payments.
segregation of duties
The concept of having more than one person required to complete a specific activity, such as making a vendor payment or collecting and posting revenue from customers.
standing wire
A type of wire transfer where a company establishes repetitive transfer instructions to move funds between two specified accounts automatically when previously determined criteria are met.
sweep account
An account used by a US organization that has its depository institution move any excess, end-of-day funds into an investment account.
trade acceptance
A financial instrument that is similar to a banker’s acceptance (BA) except it is drawn on, and accepted by, a buyer (importer).
trading companies
A trade payment method whereby an exporter (seller) sells products at a discount to an export trading company, which then resells the products internationally.
wholesale lockbox
A lockbox system used primarily to process low-volume, large-dollar business-to-business payments that are submitted with remittance information that may not be machine-readable.
zero balance account
A type of bank account where the end-of-day balance in the account is maintained at zero. Transfers are made from a header account to fund this account, typically at the end of the day.
all-in rate
An interest rate that consists of a base rate plus a spread that is added to, or occasionally subtracted from (depending on the borrower’s creditworthiness), the base rate.
basis point
A common measurement unit used for interest rates and other financial percentages. It is equal to one hundredth of one percent.
bond equivalent yield
A calculation for restating semiannual, quarterly, or monthly discount bond or note yields into an annual yield. This type of yield is calculated on a 365-day year basis.
cleanup period
In relation to a commercial line of credit, this is a period of time, usually occurring annually, during which the borrower must pay down all outstanding borrowings and reduce the balance of the loan to zero.
commitment fee
A fee assessed based on the total amount or unused portion of a committed line of credit.
committed line of credit
A credit facility that the lender is legally obliged to provide, subject to the terms and conditions of the agreement, and that cannot be unilaterally withdrawn.
default premium
An adjustment to the base interest rate to account for possible default on an investment.
discount rate
This is the rate used to determine the present value or purchase price of an instrument or investment.
dividend capture
A tax-motivated, short-term investment strategy that is available to corporations that pay taxes in the United States. A corporation may exclude from its taxable income 70–80% of the dividends received from stock owned in another corporation, as long as it owns the stock for at least 46 days of the 91-day period starting 45 days prior to the ex-dividend date.
dollar discount
The difference between the purchase price and the par, or maturity, value on discounted investment instruments, such as US Treasury bills, commercial paper, and banker’s acceptances. This difference represents interest earned on the investment.
euro short-term rate (ESTER/€STR)
The risk-free reference rate for the European Central Bank (ECB).
holding period
The expected period of time that a particular investor will own a given investment or asset, generally the time between when the asset is purchased and when it is sold.
holding period yield
The yield computed for the time a security is owned.
inflation premium
An adjustment to the base interest rate to account for projected inflation over the investment period.
issuer credit rating
A credit rating that represents a rating agency’s opinion on the obligor’s overall capacity to meet its financial obligations.
issue-specific credit rating
A credit rating of a specific long- or short-term security that considers the attributes of the issuer, as well as the specific terms of the issue, the quality of the collateral, and the creditworthiness of the guarantors.
liquidity premium
An adjustment to the base interest rate to account for the lack of liquidity on an investment.
loan covenant
A requirement included in a loan agreement that serves to protect the lender.
loan syndication
A type of lending arrangement in which multiple financial institutions share the funding of a single credit facility.
maturity premium
An adjustment to the base interest rate of a longer-term security to account for the increased price risk created by a longer duration.
money market yield
A calculation for restating semiannual, quarterly, or monthly discount bond or note yields into an annual yield. This type of yield is calculated on a 360-day year basis.
real risk-free rate of interest
The rate demanded by lenders or investors to compensate for delaying their use of the money today, in the absence of any risk or inflation, for a one-year maturity.
reference interest rate
A benchmark interest rate that is used to determine other interest rates.
reinvestment risk
The risk associated with the potential of lower interest rates when investing proceeds from maturing investments.
risk/return trade-off
The principle that potential return rises with an increase in risk. Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns.
single payment note
A type of note that is usually granted for a short period of time and specific purpose, with both the principal and interest amounts paid at maturity.
Treasury bond
A marketable, fixed-interest US government debt security with a maturity of more than 10 years.
Treasury note
A marketable US government debt security with a fixed interest rate and a maturity between one and ten years.
uncommitted line of credit
A credit facility that the lender may withdraw without notice or reason.
year basis
The number of days in a year, when calculating the yield on an investment.
yield curve
A plot of the yields to maturity on the same investment instrument or class of instruments, but with varying maturities, as of a specific date.
correlation
The degree of association between two variables.
degree of certainty
In the cash flow forecasting process, this is the practice of designating cash flows as known cash flows, predictable cash flows, less predictable cash flows, or volatile cash flows.
disbursements schedule
A schedule that involves forecasting the cash outlays for purchases and other cash outflows, such as payroll, taxes, interest, dividends, rent, and debt repayments.
extrapolation
This process uses identified past trends to predict the pattern of future cash flows.
forecasting horizon
In the cash forecasting process, this is the time interval over which information is to be forecasted.
ongoing validation
In the refinement of a forecasting model, this process involves using continuing feedback from comparisons of projected versus actual values and allows continuous evaluation and improvement of the forecast.
regression analysis
A statistical technique that uses historical data to identify the relationship between two variables. Once identified, the relationship can be used to develop forecasts.
rolling forecast
A type of forecast in which the forecast is updated to add a new period at the end of each period. Typically, the number of periods in the forecast (days, weeks, months, etc.) remains constant, but old periods are not presented and new periods are added as the forecast progresses.
simple moving average
A statistical forecasting methodology (and type of time series forecasting) that bases the forecast on a rolling average of past values for a series.
variance analysis
A type of analysis used in forecasting to determine the reason for any significant differences between forecasted and actual results, with a view to amending the future forecast process to improve long-term accuracy.
application programming interface
A set of routines, protocols, and tools for building software applications. It acts as a software gateway between programs, allowing the data from one application to be used in another platform or service.
authentication
In information or electronic payment security, this is the ability to know, with a reasonable amount of certainty, who is accessing information or initiating a transaction.
blockchain
A type of distributed ledger technology consisting of data structure blocks that may contain data or programs, with each block holding batches of individual transactions and the results of any executables.
cryptocurrency
A form of virtual currency that uses distributed ledger technology, or blockchain, to verify and record transactions.
dashboard
A user interface or display that summarizes and presents information in a way that is easy to read and understand.
digital certificate
An electronic commerce security product that ties the identity of the user (private key) to the user’s public key and may also authenticate the devices used to create documents or transactions.
digital signature
A message encoded with the sender’s secret, private key that the receiver can use to identify the source.
digitized signature
A scanned version of a written signature.
electronic bank account management
A type of bank account management process that attempts to digitize much of the process by employing electronic messages and files in the data exchange between banks and their customers.
electronic data interchange
A traditional building block of electronic commerce that is based on an infrastructure using standardized communication formats to exchange business data between two trading partners.
encryption
The process of transforming information using some type of computer-based model to make it unreadable to anyone except those possessing special knowledge, similar to a password, usually referred to as a key.
enterprise resource planning system
A sophisticated information management, production, and accounting software package that links different functional areas or operational divisions of a company on an enterprise-wide basis.
hosted solution
A type of software solution in which the vendor runs the application on its own technology platform, and firms access the software over the internet using personal computers.
multifactor authentication
An authentication method for information technology and network purposes requiring the presence of different factors of authentication.
non-repudiation
The inability of the purported maker or originator of a statement, document, or payment to challenge the validity of the original item. The term may also be used to refer to the inability of a receiver to deny having received the item.
public-key infrastructure
A data encryption methodology designed to provide security over traditionally unsecure networks, such as the internet.
single sign-on
A software technique that allows an individual to enter one username and password in order to access multiple applications on the same network or at the same host.
software as a service
A distribution model in which software is run on a hosted technology platform and provided to the end user on an as-needed basis. Applications are typically accessed over the internet using a browser. The vendor is responsible for updating and maintaining the software, as well as providing for appropriate backup and disaster recovery.
straight-through processing
An initiative used by companies in the financial industry to optimize the speed at which transactions are processed by eliminating all manual intervention so that a particular process is totally electronic from beginning to end.
token
A security device that the owner uses to authorize access to a network or online service.
treasury management system
A computer system, typically a stand-alone personal computer- (PC-), client/server-, or cloud-based system, that has software that gathers information from both internal and external sources for use by the treasury area of an organization.
workflow management system
Technology that enables a company to use software to implement, monitor, and enforce the specific processes and procedures that it wants used throughout the company.
account takeover
A type of fraud in which a hacker gains access to a company’s bank account information and uses that information to remove funds from the account.
business interruption insurance
A type of insurance coverage that provides payments to an organization in the event it is unable to pursue a normal line of business for some period of time due to an unforeseen event.
cash flow at risk
A type of value at risk calculation used to assess the risk of a cash shortfall over a longer period of time.
casualty insurance
This type of insurance provides specific coverage for a variety of losses, but is primarily concerned with the legal liability of losses caused by personal injury or property damage.
contractual transfer
A form of risk transfer in which the burden of the risks in question is transferred to another party, who is not an insurer, via a written agreement.
cyber risk
A type of risk associated with security breaches involving employee, customer, and corporate data. These security breaches may come from both internal and external sources. Data may be corrupted, ransomed, or stolen and sold to third parties.
difference in conditions
A type of insurance that covers property for perils not covered by basic property insurance policies. It is often purchased to fill voids in policies purchased overseas and to insure property in transit.
directors and officers insurance
A type of insurance that covers situations in which an officer of an organization commits a negligent act or omission, or makes a misstatement or misleading statement, and a legal action is brought against the organization as a result.
employee risk
A type of risk that is related to unintentional errors made by employees. Examples include employee errors in data entry or reentry, as well as transposition or deletion of numbers.
enterprise risk management
A comprehensive, organization-wide approach to identifying, measuring, and managing the various risks that threaten the achievement of an organization’s strategic objectives and therefore its overall operations. It is characterized as having a viewpoint that encompasses all areas of the organization.
equity price risk
A type of risk usually associated with volatility in stock prices.
event risk
A type of risk associated with unexpected events related to a given organization. Event risk includes an unplanned corporate reorganization or a large natural disaster.
umbrella insurance
A type of insurance coverage that supplements basic or primary liability coverage. Policies generally pay after the primary policy’s limits have been exhausted.
external theft/fraud risk
The risk of theft or fraud involving individuals external to the targeted company.
fidelity bond
A type of insurance coverage that guarantees payment for money or other property lost through dishonest acts of bonded employees, either by name or position.
foreign exchange risk
A type of risk that arises from the exposure an organization has as a result of transactions, assets, and liabilities that are denominated in a foreign currency.
geopolitical risk
A type of risk that arises from the impact of global political uncertainty on a company’s ability to achieve its business objectives in a particular jurisdiction.
group captive
An approach to risk retention in which a subsidiary is owned by multiple owners for the purpose of insuring the risk of the parent owners or their affiliates.
insurance risk management
A risk management technique in which financial protection for possible losses is purchased from another party in the form of insurance.
interest rate risk
A type of risk that relates to changes in investment values and borrowing costs, and potentially in overall firm value, as interest rates change.
legal risk
A type of operational risk that relates to lawsuits brought against a company.
liability insurance
Any type of insurance policy that protects against damage to other parties that can arise from product defects; business practices; accidents; actions of the organization’s employees, officers, or board of directors; and general negligence in the operation of the organization.
market risk
A type of risk that involves the possibility that fluctuations in financial market prices and rates will reduce the value of a security or a portfolio.
Monte Carlo simulation
A type of simulation/analytical technique in which a large number of simulations are run using random quantities selected from a probability distribution of values for specified variables. The resulting probability distribution is analyzed to infer which values are most likely to occur.
noninsurance
An approach to risk retention, this technique involves relying on normal revenues to pay for small, normal losses as current expenses.
operational risk
The risk of direct and indirect losses resulting either from external events that impact an organization’s operations or from inadequate and failed internal processes, people, and systems.
process risk
A type of internal operational risk related to an organization’s processes. The risk usually comes from a lack of proper controls or the failure of employees to follow procedures, due to a lack of training.
property insurance
A type of insurance that provides for reimbursement in the event of a loss of or damage to some type of asset (e.g., buildings, equipment, or inventory).
ransomware
A type of malicious software (malware) that allows a third-party fraudster to assume control of an organization’s computer systems.
reinsurance
A process that allows the initial indemnifier (usually an insurance company) to reduce its exposure to a particular loss event by transferring some or all of a risk to other insurers.
risk and control self-assessment
A risk profile analysis process that identifies the risks, classifies each risk into clearly defined categories, and quantifies the risks with respect to the probability of occurrence as well as the financial impact. The analysis can be used to evaluate the effectiveness of the risk reduction measures that are employed.
risk appetite
An organization’s own assessment of its tolerance for risk.
risk financing
The process of identifying and/or raising the funds needed to recover from a loss.
risk profile
An assessment of how a company’s overall value changes as financial variables change.
risk retention
A risk-financing approach that involves the use of an organization’s internal financial resources to provide funds to finance a recovery from losses.
risk transfer
The shifting of responsibility for a risk from one party to another, often through insurance.
self insurance
An approach used by some organizations as an alternative to purchasing insurance. This practice is not technically a form of insurance because it does not involve a transfer of risk to an insurer or another separate entity; instead, the organization will cover its own losses.
strategic risk
The risk associated with the execution of the business plan or strategy established by a company’s management. It includes the risk of major investments for which there is a significant uncertainty about success or profitability.
value at risk
A risk management measurement that is used to determine how changing financial variables will affect a company’s value. It is designed specifically to incorporate a wide range of risk factors and summarize their impact in a single measure.
velocity
In the context of risk management, the speed at which a risk would materialize.
American option
A type of option contract that can be exercised on or any time prior to the stated expiration (delivery) date of the contract.
arbitrage
The process by which an asset is purchased in one financial market and simultaneously sold in another market to produce a riskless profit.
Bermudan option
A type of option contract that is exercisable only on specified dates that are spaced evenly over the option’s life.
bid-offer quote
A price quote in which a dealer or other entity provides both the price at which it is willing to purchase and sell a specific currency, commodity, or security.
call option
A type of option contract that gives the contract owner the right, but not the obligation, to buy the underlying asset from the contract writer at a fixed price on or before the delivery date.
currency derivative
A hedging instrument that allows trading partners to establish predetermined exchange rates for set periods, which effectively protects against foreign exchange risk.
European option
A type of option contract that may only be exercised on the actual option (delivery) date specified in the contract.
exotic currency
A foreign exchange term used for a currency that is not widely traded (sometimes referred to as a thinly traded currency). These currencies can be difficult and expensive to trade due to a lack of liquidity or available counterparties.
forward
An agreement between two parties to buy or sell a fixed amount of an asset to be delivered at a future date and at a price agreed upon today.
forward foreign exchange rate
A rate quoted for the delivery (or settlement) of currency beyond the terms of a spot contract (i.e., beyond two business days following the date of the trade).
forward points
The adjustment to a spot foreign exchange (FX) rate to reflect the interest rate differential between two currencies’ interest rates over the term of a forward contract.
forward rate agreement
A forward contract in which two parties agree that a certain interest rate will apply to a certain notional principal at a future date. The documentation will specify the forward date and the term of the underlying benchmark, typically in months or years.
futures
Standardized agreements, that can be traded on an organized exchange, between two parties to buy or sell a fixed amount of an asset to be delivered at a future date and at a price agreed upon today.
hedging
The act of taking a financial position to reduce or offset the risk posed by another financial position.
interest rate option
An option-type derivative where the payoff depends on the level of interest rates.
natural hedging
The use of identified correlations to manage financial risk exposures.
notional principal
The base amount of a financial transaction, used to calculate interest payments.
option
A contract giving the buyer of the contract the right, but not the obligation, to buy or sell a fixed amount of an underlying asset at a fixed price on or before a specified date.
option premium
The price paid for the option contract.
put option
A type of option contract that gives the contract owner the right, but not the obligation, to sell the underlying asset to the contract writer at a fixed price on or before the delivery date.
speculation
A practice that involves taking a position on the direction of the market in order to make a profit, which is not usually a treasury objective.
spot foreign exchange rate
A rate quoted for the delivery (or settlement) of currency one or two business days following the date of the trade.
swap
An agreement between two parties to exchange a set of cash flows at a future point in time.
transaction risk exposure
A type of exposure that arises when a company creates receivables, payables, or other cash flows that are denominated in a currency other than its functional currency. Thus, the ultimate value of these receivables or payables when they are collected or paid may be different from when they were created, due to possible changes in the exchange rate between the currency of denomination and the company’s functional currency.
translation risk exposure
A type of exposure that is created when a company holds assets or liabilities in a currency other than its reporting currency on its balance sheet or when a foreign subsidiary’s financial statements are converted into the parent company’s reporting currency as part of the process of consolidating a company’s financial statements into a common currency. The exposure occurs because the value of the foreign assets and liabilities may change from one accounting period to the next as the underlying foreign exchange rates change.
internal controls
Measures taken by an organization to provide reasonable assurance regarding achievement of the organization’s objectives related to operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations, and policies.
external controls
Measures that affect a company’s operations, but which are enacted by the government or other organizations rather than by the company itself. These may include any rule or regulation that has an effect on the actions of the company, any tax law enacted by the government which affects the flow of money, a lease that restricts what a company can or cannot do with its office space, or other such measures.
asset allocation
The mix of instruments in a capital market investment portfolio, both by type of investment (e.g., bonds, equities, private equity, real estate, and other instruments) and by maturity.
beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
capital asset pricing model
A model that describes one possible relationship between risk and the required rate of return on an asset.
capital preservation
An investment goal in which investors want to maintain the purchasing power of their investments while minimizing the risk of loss.
covariance
A measure of the degree to which returns on two assets/stocks move in tandem.
diversification
A method of managing risk by including a wide variety of investments with differing characteristics in a portfolio so that the risk of loss due to the failure of any one individual security is minimized.
duration
A measurement of a bond’s price sensitivity to interest rate changes.
fixed/floating ratio
A measurement of the balance in an investment or debt portfolio between instruments paying a fixed rate of interest and those paying a floating rate of interest. It acts as a measure of exposure to interest rate risk, from both investment and funding perspectives.
Gordon growth model
A common stock valuation model used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate.
long-term investment
Any investment with a term greater than one year.
risk-free asset
A type of asset that has a certain future return.
yield to call
The yield a bond would provide if the issuer exercises the right to redeem the bond prior to maturity.
yield to maturity
The rate of return anticipated on a bond if it is held until the maturity date.
yield to worst
The lowest possible yield that can be received on a bond without the issuer actually defaulting.
American depositary receipt
A type of security issued by an American custodian bank to allow American investors to trade stock in a non-US company.
capital structure
The mix of long-term debt and equity used to fund the assets held by a firm.
cumulative voting
A form of voting that allows a shareholder as many votes per share owned as there are open positions on the board in the same election.
deemed dividend
A situation that occurs when payments on loans, sales of stock, or other transactions are interpreted by tax authorities as an attempt by a company to avoid paying taxes on dividends. The payments may be considered dividends and appropriate taxes charged.
dividend declaration date
The date when the board of directors announces a dividend.
dividend policy
A company’s approach regarding whether to pay dividends and, if so, how much and when to pay.
dividend record date
The date on which all shareholders of record become entitled to receive a declared dividend.
dividend reinvestment plan
A plan that enables existing shareholders to purchase additional shares directly from the company on a when-desired basis, normally with no commission or with only a small processing charge. These plans also allow investors to elect to reinvest dividends automatically in additional shares of company stock.
dividend signaling
A theory that dividends have information content or an indicating effect. Dividends are observed to contain information that hints at management’s intentions to investors and may provide information regarding expected future earnings.
ex-dividend date
The first date on which a stock is sold without entitlement to the upcoming dividend.
finance lease
Under US Generally Accepted Accounting Principles (US GAAP), a type of lease that are essentially an alternative to borrowing the funds and purchasing the asset in question.
hostile takeover
The acquisition of one company by another that is accomplished by going directly to the target company’s shareholders to get the acquisition approved.
intercompany dividend
A type of dividend on intragroup shareholdings. It is often used in large companies with wholly owned subsidiaries to transfer profits from subsidiaries back to the parent company.
leveraged buyout
A type of acquisition that is financed using a significant proportion of debt, with the primary form of collateral being the acquired firm’s assets.
optimal capital structure
The mix of long-term debt and equity that produces the minimum weighted average cost of capital for a firm.
perpetual bond
A bond without a maturity date. The issuer makes a regular interest payment but is never required to repay the principal.
preemptive right
A shareholder right that provides existing shareholders the first right to purchase shares of any new stock issue on a pro rata basis.
repatriation of capital
The transfer of funds from foreign subsidiaries back to the parent company in the home country.
residual value
The amount of value remaining after all allowable depreciation charges have been subtracted from a depreciable asset’s book value or the estimated value of an asset at the end of a lease.
reverse split
The opposite of a stock split, this is a process in which a company merges two or more existing shares of stock to create one share of new stock.
special dividend
A dividend that is paid on a one-time basis, rather than as a regular quarterly dividend.
stock dividend
A dividend that pays shareholders additional shares of stock rather than cash dividends.
stock repurchase
A practice where a company uses some of its profits to purchase existing shares of its stock, either on the open market or directly from shareholders.
stock split
A process in which a company exchanges each existing share of stock for more than one share at a reduced share price, thereby placing the stock into a more desirable price range.
target capital structure
The specific capital structure that a company has set as its desired structure. This is typically the mix of debt and equity the company will use in raising new capital.
thinly capitalized
A description of a company that has a very small amount of capital or initial investment in relation to the amount of business the company conducts. The term is often used by taxing authorities in referring to subsidiary companies run by foreign corporations with minimal initial investment.
