Glossary -
Abandonment risk	Abandonment risk arises in project financing. It is the risk that the project will be abandoned, and arises when the interests of the industrial manager and the bankers diverge. The project financing contract must lay down clear rules on how decisions affecting the future of the project are to be taken.
Accelerated book-building	Accelerated book-building is book-building completed in few hours. Accelerated book-building is often used for block trades.
Accelerated depreciation	Accelerated depreciation is any depreciation method that produces larger depreciation charges in the early years of the life of a fixed asset than would have been case with straight-line depreciation.
Account balancing	In account balancing process, cash surpluses are pooled on a daily basis into a concentration account (see concentration bank) through interbank transfers and are used to finance accounts in debit.
Accounting criteria of value creation	These criteria, which appeared first in financial communication, include earnings per share, net income, ROE, CFROI, and ROCE. They in fact measure accounting profitability and not value creation. The problem of these indicators is that they can be easily manipulated, precisely because of their accounting nature. Accounting nature means not taking into account the risk of the company and/or its cost of equity. Only ROCE avoids this bias. This is the reason why ROCE has recently become the main measure of economic performance.
Accounting currency risk	Accounting currency risk arises from the consolidation of foreign subsidiaries, including equity, dividend flows or financial investments denominated in foreign currencies, and exchange rate discrepancies. See also translation.
Accounting procedures with an impact on earnings	A table analyzing the impact on earnings of all major accounting procedures is presented at the end of chapter 8.
Accounts payable	Accounts payable are calculated as accounts payable and related accounts less advances and deposits paid on orders.
Accounts receivable	Receivables are calculated as follows: Customer receivables and related accounts + Outstanding bills discounted (see discounting of bills of exchange) - Advances and deposits on orders being processed.
Accretion	Accretion is an increase in EPS.
Accruals	Accruals are used to recognise revenues and expenses booked in one period but relating to another period. Main categories of accruals are prepaid income, prepaid charges, accrued income, and accrued expense.
Accrued expense	Accrued expenses are charges relating to goods or services supplied in current period, but not yet paid for. See also accruals.
Accrued income	Accrued income is the income earned in this period, but which will be received in the following periods. See also accruals.
Acid test ratio	See quick ratio.
Acquisitions	Expenditure for the purchase of a company or a share in a company.<br><br>\n<br>\n\n
Acquisitions	Expenditure for the purchase of a company or a share in a company.<br>\n\n
Acquisitions	Expenditure for the purchase of a company or a share in a company.\n
Adjustable rate preference shares	Adjustable rate preference shares have a dividend yield pegged to an index rate (see interest rate), such as Treasury bill or Treasury bond. See also preference shares.
Adjustable-rate debt security	See variable-rate debt security.
Adjusted present value, APV	Adjusted present value is a technique for valuing a levered company. It takes into account all sources of value creation and destruction. The adjusted present value is equal to the sum of the value of the unlevered company and the value of tax shield less the present value of financial distress costs. Each of these components is discounted (see discounting) at different rates representing the different risks. Difficult to implement, this method can yield interesting results in the very specific cases: very evolutive financial structure over short-term (this is the case of LBO transactions or project financing), an investment made in foreign markets.
Administrative synergy	Administrative synergy is a synergy derived from the improvement in the everyday running of the acquired company. See also synergy.
ADR	See American depositary receipt.
Advance dividend	Advance dividend consists in paying a fraction of the forthcoming dividend in advance. The decision is taken by the board of directors or the executive board, but does not need to be approved by the OGM. An advance dividend offers a way of smoothing cash inflows to shareholders and cash outflows from the company. In the United States, Canada and the United Kingdom, advance dividends are common. Advance dividends are also called intra-annual dividends.
Affirmative covenant	See positive covenant.
Agency costs	The diverging interests of the various stakeholders (shareholders, managers, and creditors) in a company generate a number of costs called agency costs. These comprise: the cost of monitoring managers' efforts (control procedures, audit systems, performance-based compensation); the costs incurred by the agents to vindicate themselves and reassure the principals that their management is effective, such as the publication of annual reports; residual costs. Agency costs are also related to shareholders' behaviour to the detriment to creditors, when the company is in financial difficulties (undertaking of risky projects, sell-off of the assets in place, refusal to invest in NPV-positive projects).
Agency theory	Agency theory says that a company is not a single, unified entity. Agency theory calls into question the claim that all of the stakeholders in the company (shareholders, managers, and creditors) have a single goal - value creation. Agency theory shows how, on the contrary, their interests may differ and some decisions (related to borrowing for example) or how products (stock options) come out of attempts to achieve convergence between the interests of managers and shareholders to protect creditors. Agency theory analyses the consequences of certain financial decisions in terms of risk, profitability and, more generally, the interests of the various parties. Agency theory is the intellectual basis of corporate governance. See also agency costs.
Agent bank	An agent bank is responsible for maintaining a fiduciary relationship with the other lenders participating in a syndicated loan.
Agent fee	An agent fee is an annual fee paid to agent bank for administering the syndicated loan.
Agreement in principle	The agreement in principle is one of the stages of private negotiations. Agreement in principle spells out the terms and conditions of the sale. The commitments of each party are irrevocable, unless there are conditions precedent, such as approval of the regulatory authorities.
Alliance	An alliance is a commercial or technology agreement negotiated directly between two companies and that does not involve a transaction on the equity of either of them.
All-in cost	All-in cost is the total cost of any transaction, taking into account explicit and implicit costs.
Allocative efficiency	Allocative efficiency of a financial system implies that markets channel resources to their most productive uses.
All-share transaction	All-share transaction is a merger or acquisition paid for in shares only. All-share transactions exist in three major forms: legal merger, asset contribution, and contribution of shares.
Alpha	Extra return on an asset compared with its required rate of return. For an investment fund, this is the extra return compared with an index that is representative of the assets held by the fund, for example, the FT 100 for a fund that invests in major English shares. The fund is said to outperform its market.
Also called order book.
Alternative management	Alternative management is based on market declines, volatility of volatility, liquidity, time value and abnormal valuations, rather than on rising prices. An example of alternative management is the hedge fund.
American Depositary Receipt	Foreign companies wishing to be traded in the U.S. markets, most do so through ADRs (American Depositary Receipts). These are are negotiable instruments issued by a US bank and representing the shares that it has acquired in a foreign company listed on a non-US market. There are three levels of ADR, depending on information disclosure requirements of the American regulator (Securities and Exchange Commission), with level 3 corresponding to full listing.
American option	See US-style option.
Amortisation	The loss in value of an intangible asset due to its use by the company is accounted for by means of amortisation. Amortisation is a so-called "non-cash" charge insofar as it merely reflects arbitrary accounting assessments of the loss in value.
Amortisation of the loan	Repayment of the loan is called amortisation of the loan. Main repayment modes: bullet repayment, repayment in tranches (or series), also called constant amortisation, and repayment in equal instalments.
Annual effective interest rate	When interest is paid more frequently than once a year, the annual effective interest rate is used to evaluate the real cost of the resource on an annual basis. To pass from the nominal interest rate to the annual effective interest rate, the following formula is used: (1 + t) = (1 + ka/n)n, where t is the annual effective interest rate, n is the number of interest payments in the year and ka/n the proportional rate during one period, or t = (1 + ka/n)n - 1.
Annuity	An annuity is the cash paid out annually for debt reimbursement and interest accrued. A constant annuity means the part of the debt in each annual payment increases, but the interest part decreases, so that the total amount remains the same over the life of the loan. The value of a constant annuity can be calculated as follows: \n PV = F x [1/k - 1/(k x (1+k)n)], where F is the annuity, k - the discounting rate, n - duration of the investments.\n If the annuity grows with the constant rate g for n years, its value is then equal to:\nPV = F0 x [(1+g)/(k-g)] x [1 - (1+g)n/(1+k)n], where F0 is the first annuity.
Annuity factor	Annuity factor is the part [1/k - 1/(k x (1+k)n)] in the annuity formula.
Apparent dilution	Apparent dilution happens after any capital increase with subscription rights (rights issue). It is only apparent because all existing shareholders can partially participate in the capital increase without spending any funds. See also real dilution.\nApparent dilution is also called "overall dilution".
Appraisal clause	Appraisal clause, one of the possible exit clauses in a shareholders' agreement, provides that the price of a transaction between shareholders is to be determined by independent appraisal.
APT	See arbitrage pricing theory.
APV	See Adjusted Present Value.
Arbitrage	With no overall outlay of funds or assumption of risk (in theory, at least!), arbitrage involves combining several transactions that ultimately yield a profit. Thanks to arbitrage, all prices for a given asset are equal at a given point in time. Arbitrage ensures fluidity between markets and contributes to their liquidity. It is the basic behavior that guarantees the efficient market.
Arbitrage pricing theory, APT	The Arbitrage Pricing Theory model, proposed by Stephen Ross, assumes that the risk premium is a function of several variables, not just one, i.e. macroeconomic variables (V1, V2,..,Vn), as well as a company "noise". \nSo for security J: rJ = a + b1 * rV1+ b2 * rV2 + ... + bn * rVn + company specific variable. \nThe model does not stipulate which V factors are to be used. They can be the oil price, changes in the yield curve, exchange rates, inflation rate, manufacturing activity indexexes, etc.
Arranger	An arranger is the global coordinator for issues of fixed income securities.
Arranging the deal	Arranging the deal is choosing the type of offering on the basis of the offering's desired goals.
Asset backed commercial paper	Asset backed commercial paper is commercial paper issued to fund the vehicles created to collect trade receivables.
Asset beta	Asset beta is linked to operating leverage and measures the deviation between its future cash flows and those of the market. Asset beta is the beta of a debt-free company. It is also called unlevered beta or beta of assets.
Asset contribution	In an asset contribution, company B contributes a portion of its assets (and liabilities) to company A in return for shares issued by company A. An asset contribution is an all-share transaction. Also called a contribution of assets or transfer of assets.
Asset coverage	Equity divided by non-current assets; indicates to what percent land, buildings, machinery etc. are covered by equity.\n
Asset turnover	Asset turnover measures the capital needed to generate a given level of sales and is the inverse to capital intensity.\nAlso called capital turnover.
Assets	Assets represent everything that the company owns and what owed to it. There are two major categories of assets: fixed assets and current assets. Assets represent the uses to which the resources the company raises from all providers of funds (shareholders, creditors, suppliers, tax authorities, etc.) are put.
Associate	An associate is a company over which a parent company has a significant influence (see also equity method).\n An associate company is also called associated undertaking or equity affiliate.
Associated undertaking	See associate.
Asymmetry - issuer/investor	Information asymmetry means that there is a gap between the quantity and quality of information available to the issuer compared with that available to the investor. To place a security, the issuer must reduce this gap. See also signalling theory.
Asymmetry - option	An option contract is fundamentally asymmetrical: each part does not have the same rights or the same obligations. The buyer of any option has the right to exercise it, but not the obligation, whereas the seller is obliged to exercise at the buyer's request.
Asymmetry - shareholder / creditor	There is an asymmetry in status between the shareholder and the creditor of a company: shareholders can lose the their whole investment in the company and at the same time potentially gain unlimited profits, while a creditor at best receives the flows stipulated in the loan contract. See also shareholders' equity and option model.
At the money	An option is at the money when the price of the underlying asset is equal to the strike price (intrinsic value is zero)
Auction	In an auction, one of the ways of selling (part of) a company, the company is offered for sale, under a predetermined schedule, to several potential buyers, who compete with each other.
Auction clause	Auction clause, one of the possible exit clauses in a shareholders' agreement, provides for an auction among the joint venture partners, when one of them is willing to sell its stake.
Average life of a bond	See duration.

Glossary - B
Backdoor equity hypothesis	Backdoor equity hypothesis associates the existence of some types of hybrid securities with the real options at the disposal of the issuer that is unwilling to raise equity immediately.
Back-stop	Back-stop acts as a floor to underwriting commitment, being a halfway between an initial bought deal and a post-book-building bought deal. The bank guarantees the seller a minimum price, even though it will also go through the book-building process.
Back-up line	Back-up line is the bank's commitment to provide financing if the market situation makes it impossible to renew the commercial paper.
Backwardation	When commodity makets show futures prices below the spot price this is known as backwardation. The reverse scenario is known as contango.\nBackwardation is unfrequent for a persishable commodity that has a cost of carry, so grains such as corn and wheat, and sugar, are often in contango.
Balance sheet	The balance sheet represents a snapshot of the cumulative inflows and outflows previously generated by the business. It lists all the assets of a business and all of its financial resources at a given moment in time. The balance sheet is always at equilibrium, guaranteed by the double-entry accounting practice adopted by all businesses.
Bank guarantee	A bank guarantee is a bank's commitment to advance funds to a third party should the bank's client default on the guaranteed obligations. The three main types of bank guarantees are documentary credit, customs guarantees and buyer's credit.
Bank-based economy	In a bank-based economy, the capital market is underdeveloped and only a small portion of corporate financing needs are met through the issuance of securities. Bank financing predominates. Companies borrow heavily from banks, whose refinancing needs are in turn covered by the central bank. A bank-based economy is also called a credit-based economy.
Bankruptcy	A bankruptcy is triggered when a company can no longer meet its short-term commitments and thus faces a liquidity crisis. Bankruptcy happens because a company does not make enough profits, and not because of significant debts. Nevertheless, the exact definition of financial distress leading to filing for bankruptcy differs from one jurisdiction to another.
Bankruptcy costs	Bankruptcy generates both direct (court proceedings, lawyers, etc.) and indirect costs (loss of credibility vis-à-vis customers and suppliers, loss of certain business opportunities, etc.). These costs have an impact on a company's choice of financial structure. Their present value should be deducted from the enterprise value of a firm.
Barrier currency option	Barrier currency rate option is a barrier option on exchange rates.
Barrier interest rate option	Barrier interest rate option is a barrier option on interest rates.
Barrier option	Barrier options are the options that are automatically created (knock-in) or cancelled (knock-out) when a limit price (barrier) is passed. They can be concluded on exchange rates (barrier currency option) or interest rates (barrier interest rate option).
Base	Base is the difference between the current spot price and the price of a future
Basis point	Basis point is 1/100 of a percentage point
Bear market	Bear market is characterised by falling prices.
Bearer bond	A bearer bond is a bond for which physical possession of the certificate is proof of ownership. The issuer does not know the identity of the bondholder.
Bearer shares	Shares that are not issued to a specific person; the rights to these securities accrue to the person who holds them.
Behavio(u)ral finance	Behavioral finance takes psychology into account when analysing investor decisions. This field of research provides recent evidence that investors can make systematic errors in processing new information - information that is otherwise profitably exploited by other investors.
Below investment grade	See speculative grade.
Benchmark	A benchmark is a very good level of performance achieved by players in the sector and used by less well-performing players as a target to achieve, in an effort to improve their own performances. As part of the implementation of best practice procedures, groups may develop a benchmarking policy within their different geographical divisions. \n\nBenchmarks are often used as efficiency ratios: margin on sales, profitability, sales turnover compared with capital employed, sales by sqm, sales by employee, etc.
Benchmark switching	Benchmark switching is the interest rate swap of one floating rate for another floating rate.
Benchmarking	Organisations (such as Central Banks, Datastream, Standard & Poor's or Moody's, etc) compiling the financial information supplied by a large number of companies publish the main financial characteristics in a standardised format of companies operating in different sectors of activity, as well as the norm (average) for each indicator or ratio in each sector. This is the realm of benchmarking. See also comparative analysis.
Best efforts basis	When the bank does not give an undertaking that the deal (issue of securities, organisation of a syndicated loan) will go through, the transaction is said to be on a best efforts basis.
Beta	Beta is the measure of the contribution of a single asset to the risk of portfolio. Beta is the covariance of this asset's returns with the returns of the portfolio. Beta measures the volatility of a security.
Beta coefficient	See beta.
Beta is also called beta coefficient.
Beta of assets	See asset beta.
Bid-ask spread	Bid-ask spread is the difference between selling (ask) and buying (bid) prices of a financial security in the market.
Bid-ask spread is also called spread.
Bill of exchange	See paper bill of exchange.
BIMBO	BIMBO is the combination of buy-in and MBO. BIMBO transaction brings in outside managers
Binomial method	The binomial method derives the value of an option by assuming that in every next moment there are two possible different prices of an underlying asset. Increasing the number of these moments to infinity will ultimately cover all possible prices. It is then possible to derive the price of an option by creating a replicating portfolio of the underlying asset and the risk-free asset.
Black & Scholes Model	Black & Scholes model, one of the most widely used approaches to valuing options, prices the European-style options. It is based on the construction of a portfolio composed of the underlying asset and a certain number of options such that the portfolio is insensitive to fluctuations in the price of the underlying asset.
Black-out period	Black-out period is a period during an initial public offering, when no information about the issuer can be disclosed.
Block	A block is a large number of shares that a shareholder wishes to sell on the market. See also accelerated book-building.
Block ownership	Block ownership corresponds to shares held in long-term strategic holdings.
Blocking minority	Blocking minority is the minority needed to veto certain decisions of the extraordinary general meeting of shareholders. A blocking minority represents one quarter or one third of the shares plus one share depending on the country and the legal form of the company.
Bolt-on projects	Construction of new plants, capacity upgrades or smaller acquisitions, that all carry synergy potential through integration with existing operations.
Bond	A bond is a negotiable debt security that is issued by corporations, municipalities, and governments. A bond pays a coupon (see coupon rate) and is redeemed in accordance with the prospectus of its issue. Bonds can carry other obligations on the part of the issuer. Bonds are the main medium-term market financing vehicles used by corporations, particularly in the five-to-ten year segment. There are various types of bonds such as convertible bonds, mandatory convertibles, exchangeable bonds, etc.
Bond redeemable in shares	A bond redeemable in shares is similar to a mandatory convertible.
Bond redemption premium	A bond redemption premium exists when a bond is reimbursed for the amount higher than its face value.
Bond value of the convertible bond	The value of a convertible bond is made of three components: value of a straight bond, conversion value of a convertible bond, and time value (this is a value of a call option on shares of the issuer). Bond value of a convertible bond is the value of a straight bond. This value is derived by discounting future cash flows of a convertible bond at a market rate of return for the level of risk of this issuer, as if a convertible bond were a straight bond.
Book	The book provides a list of investor's intentions to buy marketed securities. Investors indicate the volumes they intend to buy and at what price.
Book profitability	Book profitability is the ratio of the wealth created (i.e. earnings) to the capital invested.
Book value	Book value is an accounting measure that gives the net worth of an asset according to its carrying value on the company's balance sheet. Book value sometimes means book value of shareholders' equity.
Book value of shareholders' equity	The book value of shareholders' equity is equal to everything a company owns less everything it already owes or may owe. Book value of shareholders' equity is thus equal to: Fixed assets + Current assets - All borrowings of any kind. See also book value.
Book-building	Book-building is a technique used to place securities on the market. It is the process whereby the bank marketing the offering gets to know investor's intentions regarding the volumes and prices they are prepared to offer for the security. See also book.
Bookrunner	Bookrunner is the bank in charge of the book. See also lead manager.
Bootstrap game	The bootstrap game consists in buying undervalued companies and making the market re-rate them (see re-rating) to create value for the shareholders of the acquirer.
Bootstrapping model	The bootstrapping model creates the yield curve by first calculating the yield on one-year bond and then plugging the result in the two-year bond. The process is repeated for all maturities. The yields obtained at each step represent the points on the yield curve.
Bottom-up approach	In asset management, in a bottom-up approach, investors choose stocks on the basis of their specific characteristics, not the sector the stocks belong to.
Bought deal	A bought deal takes place when a bank buys the securities from the seller/issuer and then re-sells them to investors. The remaining unsold securities go onto the bank's balance sheet. Bought deals are used most often for transactions such as block trades of already existing shares or a bond issue.
Brands and market share	These are brands or market shares purchased from third parties and valued upon their first-time incorporation in the consolidated accounts of their new parent company.
Breakeven	Breakeven is the point at which total revenues cover total charges. With business running at this level, earnings are thus zero. Breakeven depends on the cost structure (split variable costs/fixed costs). There are three different breakevens: operating breakeven, financial breakeven, and total breakeven. Breakeven is affected by company's industrial and financial strategy.
Bridge loan	Bridge loans are set up to provide funds until permanent financing is raised (capital increases, bond borrowings or the disposal of a subsidiary) that will be used to repay it. Bridge loans are of short duration, expensive and frequently used for large transactions.
Bull market	A bull market is characterised by rising prices.
Bullet bond	A bullet bond is a bond with bullet repayment.
Bullet repayment	Bullet repayment occurs when the loan is repaid in one single payment at maturity. Bullet repayment is also known as repayment in fine.
Business cycle	Business cycle covers the time from the purchase of raw materials till the sale of the finished goods produced from these raw materials. Customer credit and supplier credit influence the length of the business cycle. The business cycle forms the basis of the company's wealth. It consists in both: wealth creation (products and services sold, i.e. products and services whose worth is recognised in the market) and wealth destruction (consumption of raw materials or goods for resale, use of labour, use of external services, such as transportation, taxes and other duties). The very essence of a business is to create wealth by means of its business cycle.
Business loan	A business loan is a loan granted to fund the company in general, without any specific purpose. Also called a financial loan.
Buy and hold	Buying and holding is a passive investment strategy with which an investor buys stocks and holds them for a long period regardless of fluctuations in the market.
Buyer's credit	Buyer's credit, one of the types of bank guarantees, is used to finance export contracts of goods and/or services between an exporter and the buyer importing the goods/services. The banks granting the buyer's credit commit to provide the borrower with the funds needed to pay the supplier directly according to the terms specified by contract. Buyer's credit is also called export credit.
Buy-in	Buy-in is the sale of a business to an external management team. Also called management buy-in (MBI).
Buy-sell provision	Under a buy-sell provision, one of various possible exit clauses in a shareholders' agreement. Shareholder A offers to sell its shares at a price X to shareholder B. Either B agrees to buy the shares at price X, or if he refuses, he must offer his stake to A at the same price X. A buy-sell provision is also called Dutch clause or shotgun clause.
By-category income statement format	See by-nature income statement format.
By-destination income statement format	See by-function income statement format.
By-function income statement format	This format is produced according to the way revenues and charges are used in the business cycle and investing cycle. The by-function income statement format shows the cost of goods sold, selling and marketing costs, research and development costs and general and administrative costs.
By-nature income statement format	This format is produced according to the nature of revenues and charges (how they are booked). The by-nature income statement format shows material consumption, staff costs, external costs depreciations. Also known as the by-category income statement format.

Glossary - C
Call option	A call option is an option to buy an underlying asset.
Call provision	Some bonds are issued with a call provision that allows the issuer to buy them back at a predetermined price.
Callable instrument	A callable instrument is a security containing a call provision. See also putable instrument.
Cap	1. A cap is an interest rate option that allows a borrower to set a ceiling interest rate above which he no longer wants to borrow. On the exercise date he will receive the difference between the market rate and cap rate.\n2. Cap sometimes stands for market capitalisation.
Capital adequacy ratio	Capital adequacy ratio is the limit on the risk-weighted credit exposure allowed to each financial institution depending on its capital base. It is also called the Cooke ratio. From 2005, it will be replaced by the McDonough ratios.
Capital Asset Pricing Model, CAPM	The CAPM is based on the assumption that investors act rationally and have at their disposal all relevant information on financial securities. CAPM is the universally used tool for valuing financial securities. CAPM states that all investors should hold the market portfolio, and the risk premium they will demand is proportional to market beta. According to CAPM, the expected return of an asset will then be a linear function of beta: Expected return of a financial security = risk-free rate + ? x (expected return of the market - risk-free rate)
Capital decrease	Capital decrease is a cancellation of shares repurchased by the company from existing shareholders. Capital decrease is also called capital reduction.
Capital employed	Capital employed is the sum of a company's fixed assets and its working capital (i.e. operating working capital and non-operating working capital). It is therefore equal to the sum of the net amounts devoted by a business to the operating cycle and investment cycle. Also known as operating assets. Capital employed is financed by two main types of funds, shareholders' equity and net debt, sometimes regrouped under the heading of invested capital.
Capital expenditures	Capital expenditures are acquisitions of tangible fixed assets and intangible fixed assets. They are commonly called capex. See also investment.
Capital gain/loss	Capital gain/loss is the positive/negative difference between the selling price of an asset, when this asset is sold, and its original purchase price.
Capital increase	From a financial point of view, a capital increase is the sale of shares. Proceeds of this sale go to the company. A capital increase will lead to a change in different indicators: right to dividends, to profits, to liquidation sale proceeds, to equity, to voting rights amongst different funds providers. Capital increases can be made in cash or by asset contribution, following the exercise of warrants or a debt conversion, be reserved or not, and with or without preferential subscription rights.
Capital intensity	Capital intensity measures the level of sales generated by a given amount of capital. Capital intensity is the inverse of asset turnover.
Capital invested	See invested capital.
Capital lease	See finance lease.
Capital market economy	See market-based economy.
Capital market line	The capital market line links the market portfolio to the risk-free asset. For a given level of risk, no portfolio is "better", i.e. offering better risk/return ratio, than those located on this line. The capital market line is graphically tangent to the efficient frontier containing the market portfolio.
Capital rationing	A firm faces capital rationing, when it is not possible to raise capital, even if profitability meets the required rate of return. Two major forms of capital rationing: hard rationing and soft rationing.
Capital reduction	See capital decrease.
Capital structure	Capital structure is the proportion of net debt to equity in the company's financing. Capital structure is also called financial structure.
Capital turn	See asset turnover.
Capital-employed analysis	In the capital-employed analysis, the balance sheet shows all the uses of funds for the company's operating cycle and analyses the origin of its sources of funds. A capital-employed analysis of the balance sheet serves three main purposes: to understand how a company finances its operating assets; to compute the rate of return on capital employed; and as a first step to valuing the equity of a company as a going concern.
Capitalisation	Capitalisation of income means to forego receipt of it. It then becomes capital and begins itself to produce interest over subsequent periods. The capitalisation formula runs as follows:\nVn = V0 x (1 + t)n, where Vn is the terminal capital, V0 - the initial investment, t - rate of return, n - duration of the investment.
Capitalisation factor	The part (1 + t)n in the capitalisation formula is called the capitalisation factor.
CAPM	See Capital asset pricing model
Captive insurance company	A captive insurance company is an insurance company set up by a large group that has adopted a self-hedging policy. A captive insurance company invests the premiums saved as a result of not buying any external insurance to build up reserves in order to meet future claims. In the meantime, some of the risk can be sold on the reinsurance market.
Carried interest	The general partners' share of the profits made by a private equity fund (often 20%), if the IRR of the fund's investors reaches a given percentage (often 8%) per year. It is a form of performance driven profit sharing.
Carrybacks	See tax loss carrybacks.
Carryforwards	See tax loss carryforwards.
Carveout	A carveout is the selling of a stake in a subsidiary on the stock exchange (this can be preceded by the actual creation of the subsidiary).
Cash (and cash equivalents)	Cash, alongside wealth, is one of the two fundamental concepts of corporate finance. In a corporate context, cash includes currency (paper money), coins, cheques, money orders, traveller's cheques, cashier's cheques, bank drafts, balances on current accounts, and receipts from credit card sales. It is important to remember that cash disbursement does not necessarily reduce wealth and that cash receipt does not necessarily increase wealth, although ultimately the wealth created will be reflected in the cash position of the company.\nCash is also called liquidity.
Cash budget	See cash flow budget.
Cash certificate	Cash certificates are time deposits that take the physical form of a bearer (for the notion of a bearer security see bearer bond) or registered certificate (for the notion of a registered security see registered bond).
Cash flow	Cash flow is financing that is internally generated by the company. Cash flow is equal to EBITDA less net financial expense less corporate income tax. Cash flow can also be calculated by adding to net income depreciation, amortisation, and impairment losses, the net result of asset disposals, and the net result of extraordinary events (see extraordinary items and exceptional items).
Cash flow budget	Cash flow budget is a document projecting future trends in the cash flow of the company. It is a forward-looking management chart showing supply and demand for liquidity within the company. Cash flow budget allows the treasurer to manage interest expense as efficiently as possible by harnessing competition not only among different banks, but also with investors in the financial markets. Cash flows are usually classified by different category. One of the possible classifications deals with business cycle and investment cycle, which form industrial and commercial life of the company, and with debt cycle and equity cycle, which form the financing life (see financing cycle) of the company. Cash flow budget is also called cash budget or cash flow plan.
Cash flow fade model	The cash flow fade model is a valuation model based on DCF that takes into account the phenomenon of gradual convergence of ROCE to WACC after the end of the explicit forecast period. In this model, free cash flow decreases gradually after the end of the explicit forecast period.
Cash flow from operating activities	See operating cash flow.
Cash flow from operations	See operating cash flow.
Cash flow matching approach	See matching principle.
Cash flow plan	See cash flow budget.
Cash flow return on investment, CFROI	Cash Flow Return on Investment (CFROI) in its simplified version compares EBITDA with gross capital employed: CFROI = EBITDA/ Capital employed. This ratio is used particularly in business sectors in which charges to depreciation do not necessarily reflect the normal deterioration of fixed assets, e.g. in the hotel business. Cash flow return on investment is one of the accounting indicators of value creation. \nThe original version of CFROI corresponds to the average of the internal rates of return on the company's existing investments. It measures IRR earned by a firm's existing projects in order to compare it with WACC and thus estimate the value creation. This version is one of the economic indicators of value creation. It requires a lot of adjustments and is thus much less popular than the simplified version.
Cash flow statement	Cash flow statement is a document containing the information about past trends in the cash flow of the company. Cash flows are usually classified by different category. One of the possible classifications deals with the business cycle and the investment cycle, which form the industrial and commercial life of the company, and with the debt cycle and the equity cycle, which form the financing life (see financing cycle) of the company. The cash flow statement is also called statement of changes in financial position.
Cash flow value	The term cash flow value groups together the valuations of a company derived from the DCF and multiples methods, which are based on the anticipation of future profits.
Cash management	Cash management is the traditional role of the treasury function. It handles cash inflows and outflows, as well as intra-group fund transfers. Cash management tools: cash pooling, notional pooling.
Cash mutual fund	See money market fund.
Cash pooling	Cash pooling balances the accounts of a group's subsidiaries, thereby saving on interest expense deriving from the market's inefficiencies. It is one of the cash management tools used on a group-wide basis.
Cash ratio	Cash ratio is calculated by dividing cash and cash equivalents by current liabilities (due in less than one year). The cash ratio is generally very low. Its fluctuations often do not lend themselves to easy interpretation.
Cash Value Added	EBITDA - (historical capital employed x hurdle rate).
CBO	See Collateralised debt obligation
CD	See certificate of deposit.
CDO	See collateralised debt obligation.
Certificate of deposit, CD	Certificates of deposit are time deposits represented by a dematerialised negotiable debt security in the form of a bearer certificate (for the notion of bearer see bearer bond) or order issued by an authorised financial institution.
CFROI	See cash flow return on investment.
Characteristic line	The characteristic line of the security is the graphically presented regression of the security's return versus that of the market. The slope of this line is equal to the beta of the security.
Charges	See costs.
Chart analysis	See technical analysis
Chartist	Chartist is an analyst using the methods of technical analysis.
Chirographic creditor	Chirographic creditor is an unsecured creditor.
Claw-back clause	Claw-back clause allows the securities allocated to one class of investors to be reallocated to the other class of investors, should the structure of actual market demand (retail, institutional, etc) differ from that planned originally.
Claw-back commitment	A claw-back commitment is an arrangement to use dividends received earlier to cover project funding shortfalls later.
Claw-back provision	A claw-back provision stipulates that the principal initially foregone during the restructuring process will be repaid if the company's future profits exceed a certain level.
Clearing house, clearinghouse	A clearing house is the central counterparty of all operators in organised markets. It guarantees that all contracts will be honoured.
Clientele effect	Clientele effect is generated by the different dividend taxation of different categories of investors. High-dividend stocks are sought out by investors who face low tax rates, whereas stocks that offer low dividends and large capital gains are preferred by investors in the highest tax brackets.
CLO	See Collateralised debt obligation
Closing rate method	Under the closing rate method, all assets and liabilities, as well as income statement items are translated at the closing rate which is the rate of exchange at the balance sheet date. This method of currency translation is used when the subsidiary is economically and financially independent of its parent company. The closing rate method is also called the current rate method.
Club deal	A club deal is a small syndicated loan (for amounts less than $250 million) pre-marketed within a group of banks with which the borrower has a long-term relationship
Co-lead managers	See co-leads.
Co-leads	Co-leads underwrite (see underwriting) a significant portion of the securities but have no role in structuring the deal. See also lead manager. Co-leads are also called co-lead managers.
Collar	A collar involves both the purchase of a cap and the sale of a floor, thus setting a zone of fluctuation in interest rates, below which the operator must pay the difference in rates between the market rate and the floor rate and above which his counterparty pays the difference between the market rate and the cap rate. This combination reduces the cost of hedging, as the premium of the cap is paid partly or totally by the sale of the floor. Also called rate tunnel.
Collateralised bond obligation	See Collateralised debt obligation
Collateralised debt obligation, CDO	Debt securities issued by a special purpose vehicle, often a securitisation vehicle, which buys and holds bonds issued by corporations or banks (collateralised bond obligation) or bank loans (collateralised loan obligation). \n\nCDOs provide liquidity for securities that aren't automatically liquid. It is used by banks to refinance themselves with investors wanting to take a risk on a debt portfolio. The level of the risk will depend on the nature and quality of the debts held by the vehicle and on the level of the ranking of the different debt instruments issued by the vehicle.
Collateralised loan obligation	See Collateralised debt obligation
Co-managers	Co-managers play a limited role in a placing transaction, normally just underwriting a small portion of securities. For the definition of co-managers in a syndicated loan see manager.
Combined leverage	Combined leverage is the product of operating leverage and financial leverage. It is a proxy for the total risk of a company. \nCombined leverage represents an important principle of finance. As it is the product of financial leverage and operating leverage, companies should be reluctant to increase financial leverage if the operating leverage is already high. Conversely, companies with low operating leverage (and therefore operating a stable business) can afford to be more highly geared.
Commercial currency risk	Commercial currency risk arises in the course of the operating cycle of the company. It represents the currency risk on the daily balance of commercial receipts and disbursements in every currency in which the company operates.
Commercial interest rate risk	The commercial interest rate risk depends on the level of inflation of the currencies in which the company's goods are bought and sold. See also interest rate risk
Commercial loan	Commercial loans are short-term business loans.
Commercial paper	Commercial papers are debt securities issued on the money market by companies for maturities ranging from one day to one year.
Commercial synergy	Commercial synergy is a synergy derived from the improvement in the commercial activities (most importantly, in sales process) of the acquired company. See also synergy.
Commitment fee	A commitment fee is paid annually on the undrawn portion of the syndicated loan, if the borrower reserves the right to draw funds when necessary.
Committed facility	A committed facility is one of the types of credit facilities. It is a legally enforceable agreement that binds the bank to lend up to the stated amounts. Credit lines are one of the widely used types of committed facilities.
Common equity	Common equity is the part of shareholders' equity attributable to common stock.
Common stock	Common stock is an ordinary share, i.e. which gives voting rights but no guarantee of dividend payment (unlike preference shares).
Company-friendly bankruptcy process	See debtor-friendly bankruptcy process.
Comparables model	The comparables model is a valuation model that compares all the observable values of assets that can be rationally compared, i.e. which have the same level of risk and growth. More often referred to as the multiples method.
Comparative analysis	Comparative analysis consists of evaluating a company's key profit indicators and ratios so that they can be compared with the typical indicators and ratios of companies operating in the same sector of activity. See also benchmarking.
Competitive bidding	Competitive bidding is a tender among banks. The issuer chooses the establishment that will lead the offering on the basis of the terms offered, with price being a key determinant. This technique is used for bond issues.
Completed contract method	Completed contract method consists in recognising the revenues at the end of the construction contract only.
Compound interest	When interest is capitalised (see capitalisation) and itself produces interest, it is called compound interest.
Concentration bank	A concentration bank is a bank providing the cash pooling or notional pooling to a group. See also overlay bank.
Confirmed credit line	See credit line.
Conglomerate	A conglomerate is an industrial group active in several, diverse businesses.
Conglomerate discount	A conglomerate discount exists when a conglomerate is worth less than the sum of its parts. Conglomerate discount is usually due to investor fears of poor allocation of resources and to the administrative costs incurred by the conglomerate.
Consolidated accounts	Consolidated accounts are the aggregation of accounts of a group of companies. The purpose of consolidated accounts is to present the financial situation of a group of companies as if they formed one single entity. See also scope of consolidation.
Consolidation	Consolidation is the process of creating the consolidated accounts. Consolidation sometimes stands for full consolidation.
Consolidation methods	There are three consolidation methods, which are used depending on the strength of the parent company's control or influence (see also significant influence): full consolidation, proportionate consolidation, and the equity method. The basic principle consists in replacing the historical cost of the parent's investment in the company being consolidated with its assets, liabilities and equity.
Constant amortisation	See repayment in tranches.
Construction contracts	Construction contracts may sometimes take more than one year to complete (construction of ships, dams, etc), leading to specific accounting treatment (percentage of completion method, completed contract method).
Contango	When commodity makets show futures prices above the spot price this is known as contango. The reverse scenario is known as backwardation.\nContango is normal for a persishable commodity that has a cost of carry, so grains such as corn and wheat, and sugar, are often in contango.
Contingent assets	If the off-balance sheet commitments have a positive impact on the financial position of the company, they give rise to contingent assets. These assets are recorded in the notes to the accounts.
Contingent claims model	The contingent claims model states that the creditors of a "risky" business are able to appropriate most of the increase in the company's value due to an injection of additional funds by shareholders.
Contingent liabilities	If off-balance sheet commitments have a negative impact that causes a provision to be set aside if likely to be realised, they give rise to contingent liabilities. These liabilities are recorded in the notes to the accounts.
Contingent tax liabilities	Sometimes, if the company were to take certain decisions, it would have to pay additional tax. These taxes are the result of contingent taxation. They represent contingent tax liabilities, e.g. stemming from the distribution of reserves on which tax has not been paid at the standard rate.
Contingent taxation	See contingent tax liabilities.
Contingent value rights, CVR	Contingent value rights are listed financial instruments (see listed security) issued during an acquisition to persuade shareholders to tender (or dissuade them from tendering) their shares to the takeover bid.
Contribution margin	Contribution margin is the difference between sales and variable costs.
Contribution of assets	See asset contribution.
Contribution of shares	An investor (a legal entity or an individual) exchanges its shares of company B for the shares of company A. In this case, companies A and B continue to exist, with B becoming a subsidiary of A and the shareholders of B becoming shareholders of A. Contribution of shares is an all-share transaction. For listed companies (see listed security), contribution of shares most commonly takes place in the form of a share exchange offer.
Control premium	The control premium is a price that must be paid to take control over a company. Increased protection of minority shareholders means that today in Europe it has become virtually impossible to pay the control premium to the majority shareholders only. See also majority value.
Conventional convertible preferred stock	Conventional convertible preferred stock is typically structured as either perpetual or 30-year preference share. See also convertible preferred stock.
Conversion option into shares of the target company	Mezzanine debt can sometimes be converted into shares of the company - object of an LBO transaction, thus increasing the attractiveness to mezzaniners. This possibility is known as the conversion option into shares of the target company.
Conversion premium	The conversion premium is the amount by which the conversion price exceeds the current market price of the share.
Conversion price	The conversion price of a convertible bond is calculated as the ratio of the face value of the bond to the conversion ratio.
Conversion ratio	The conversion ratio is the number of shares that can be received for one convertible bond.
Conversion value of the convertible bond	The conversion value of a convertible bond is what this bond would be worth if it were immediately converted to stock at the current market price. See also bond value of the convertible bond.
Convertible bonds	Convertible bonds are bonds that may be converted at the request of their holders into shares of the issuing company. Conversion is thus initiated by the investor. See also bond value of the convertible bond and conversion value of the convertible bond.
Convertible preferred stock	Convertible preferred stock combines the characteristics of convertible debt (see convertible bond) and preference shares.
Convexity	Convexity measures the relative change in a bond's modified duration for a small fluctuation in interest rates.
Cooke ratio	See capital adequacy ratio.
Corporate governance	Corporate governance attempts to regulate the decision-making power of executives to ensure that they do not serve their own vested interests to the detriment mainly of shareholders, but also of creditors, employees and the company in general. See also agency theory.
Corporate social responsibility	Voluntary activities of a company that support social interests and environmental issues.
Cost	Cost is a measure (cash and non-cash) of the amount of resources used to ensure the everyday running of the company (production process, selling process, etc). Cost is also called charge or expense.
Cost of capital	See weighted average cost of capital.
Cost of debt	Cost of debt for the company is the after-tax interest rate on the company's debts.
Cost of equity	Cost of equity is equal to the risk-free rate plus a risk premium that reflects the stock's systematic risk: ke = rf + ? x (rm - rf), where ke is the cost of equity, rf is the risk-free rate, rm is the expected market return, and ? is the beta of the share. Cost of equity is also called cost of shareholders' equity.
Cost of refunding	Market yield to maturity for the bonds of an issuer represent the cost of refunding, should the issuer decide to substitute