Financial Glossary

Idiosyncratic Risk: Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words, the risk that is firm specific and can be diversified through holding a portfolio of stocks.

If, as and when:
Indicates a conditional transaction in a security that is authorized for issuance, but not issued yet. New primary offerings can trade on an "if, as and when" issued basis prior to listing on an exchange.

Immediate settlement:
Delivery and settlement of securities within five business days.

The construction of an asset and a liability that are subject to offsetting changes in value.

Immunization strategy: A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a general change in the rate of interest through the use of duration.

Implied call: The right of the homeowner to prepay, or call, the mortgage at any time.

Implied repo rate:
The rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.

Implied volatility:
The expected volatility in a stock's return derived from its option price, maturity date, exercise price, and riskless rate of return, using an option-pricing model such as Black/Scholes.

Import-substitution development strategy:
A development strategy followed by many Latin American countries and other LDCs that emphasized import substitution - accomplished through protectionism - as the route to economic growth.

Imputation tax system: Arrangement by which investors who receive a dividend also receive a tax credit for corporate taxes that the firm has paid.

In-and-Out: The purchase and sale of the same security within a short period of time, usually a day, week or month. An in-and-out trader is more interested in profiting from day-to-day price fluctuations than in receiving dividends or long-term growth.

For a call, it is when the market price of the underlying interest is above the strike price of the option. For a put, it is when the market prices of the underlying interest is below the strike price of the option.

In-the-money: A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money by $0.50 an ounce.

Income beneficiary:
One who receives income from a trust.

Income bond: A bond on which the payment of interest is contingent on sufficient earnings. These bonds are commonly used during the reorganization of a failed or failing business.

Income fund: A mutual fund providing for liberal current income from investments.

Income statement (statement of operations): A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Income stock: Common stock with a high dividend yield and few profitable investment opportunities.

Incremental cash flows: Difference between the firm's cash flows with and without a project.

Incremental costs and benefits:
Costs and benefits that would occur if a particular course of action were taken compared to those that would occur if that course of action were not taken.

Incremental internal rate of return:
IRR on the incremental investment from choosing a large project instead of a smaller project.

Indenture: Agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders.

Independent project:
A project whose acceptance or rejection is independent of the acceptance or rejection of other projects.

Index: A statistical tool that measures the state of the stock market, the economy, or a particular market sector based on the performance of stocks or other meaningful components. Examples are the S&P/TSX 60 Index, the Dow Jones Industrial Average and the Nasdaq 100 Composite.

Index: A statistical measure of the state of the stock market or economy. There are indexes that measure changes in the prices of consumer goods and services (e.g., consumer price index) and others that measure the value of groups of stocks or bonds (e.g., stock market index).

Index and Option Market (IOM):
A division of the CME established in 1982 for trading stock index products and options.

Index-amortizing swaps:
These swaps generally operate as basis swaps for an initial period (the lock-out period), after which time the notional principal balance is amortized or extended based on a schedule linked to interest rate changes or some other index during the lock-out period.

Index arbitrage: An investment/trading strategy that exploits divergences between actual and theoretical futures prices.

Index fund: Investment fund designed to match the returns on a stock market index.

Index-linked deposit (ILD):
A term deposit that pays a rate of return based on the performance of one or more financial indicators such as the level of a stock market index (e.g., Toronto Stock Exchange [TSX] 60 or 35) over the term of the deposit. It differs from a savings product that pays a fixed rate of interest and assures a guaranteed return on the investment, such as a traditional GIC or term deposit. With an ILD, the original deposit is guaranteed but any return is not. An example is a market-linked GIC: if the stock market rises over the term of the investment, the investor benefits from the rise up to a maximum return. If there is no rise in the stock market, the original deposit remains fully protected but the investor will receive no return (i.e., no interest is payable).

Index model:
A model of stock returns using a market index such as the S&P 500 to represent common or systematic risk factors.

Index option:
A call or put option based on a stock market index.

Index warrant:
A stock index option issued by either a corporate or sovereign entity as part of a security offering, and guaranteed by an option clearing corporation.

Indexed bond:
Bond whose payments are linked to an index, e.g. the consumer price index.

Indexing: A passive instrument strategy consisting of the construction of a portfolio of stocks designed to track the total return performance of an index of stocks.

Indicated dividend:
Total amount of dividends that would be paid on a share of stock over the next 12 months if each dividend were the same amount as the most recent dividend. Usually represent by the letter "e" in stock tables.

Indicated yield: The yield, based on the most recent quarterly rate times four. To determine the yield, divide the annual dividend by the price of the stock. The resulting number is represented as a percentage. See: dividend yield.

Indifference curve: The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return.

Indirect quote: For foreign exchange, the number of units of a foreign currency needed to buy one U.S.$.

Inductive reasoning:
The attempt to use information about a specific situation to draw a conclusion.

Industry: The category describing a company's primary business activity. This category is usually determined by the largest portion of revenue.

Industrial revenue bond (IRB):
Bond issued by local government agencies on behalf of corporations.

Inflation: The rate at which the general level of prices for goods and services is rising.

Inflation: The average rate of increase in prices. When economists speak of inflation as an economic problem, they generally mean a persistent increase in the general price level over a period of time, resulting in a decline in a currency's purchasing power. Inflation is usually measured as a percentage increase in the consumer price index (CPI). Canada's inflation target, as set out by the federal government and the Bank of Canada, aims to keep inflation within a range of 1 to 3 per cent. If the rate of inflation is 10 per cent a year, $100 worth of purchases last year will, on average, cost $110 this year. At the same inflation rate, those purchases will cost $121 next year, and so on.

Inflation risk: Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

Inflation uncertainty: The fact that future inflation rates are not known. It is a possible contributing factor to the makeup of the term structure of interest rates.

Inflation-escalator clause: A clause in a contract providing for increases or decreases in inflation based on fluctuations in the cost of living, production costs, and so forth.

Information asymmetry: A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC): The correlation between predicted and actual stock returns, sometimes used to measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.

Information costs: Transaction costs that include the assessment of the investment merits of a financial asset.

Information services:
Organizations that furnish investment and other types of information, such as information that helps a firm monitor its cash position.

Information-content effect:
The rise in the stock price following the dividend signal.

Informational efficiency:
The speed and accuracy with which prices reflect new information.

Informationless trades:
Trades that are the result of either a reallocation of wealth or an implementation of an investment strategy that only utilizes existing information.

Information-motivated trades: Trades in which an investor believes he or she possesses pertinent information not currently reflected in the stock's price.

Initial margin requirement: When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange.

Initial public offering (IPO):
A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting fees which represent a load to buyers.

Input-output tables: Tables that indicate how much each industry requires of the production of each other industry in order to produce each dollar of its own output.

Insider: Directors, senior officers and any other people, such as lawyers and accountants, who can be presumed to have access to non-public information concerning a company. It also includes anyone owning more than 10% of the voting shares in a corporation.

Insider information:
Relevant information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.

Insider Report:
A report of all transactions in the shares of a company made by those considered to be insiders of the company. It is submitted each month to the provincial securities commissions and allows the administrators to monitor trading by such people to ensure regulations are not violated.

Insider trading: Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.

These are directors and senior officers of a corporation -- in effect those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.

Insolvency risk: The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Insolvent: A firm that is unable to pay debts (liabilities are greater than assets).

Installment Debentures: A bond or debenture issue in which a predetermined amount of the principal becomes due and payable each year. Also called a serial bond or debenture. This is popular as a municipal financing vehicle.

Installment Receipts: A new issue of stock sold with the obligation that buyers will pay the issue price in a series of installment payments instead of one lump sum payment. This is also known as partially paid shares. The buyer usually pays a deposit upon settlement, perhaps one-half the issue price of the shares, with the balance to be paid in one year.

Installment sale:
The sale of an asset in exchange for a specified series of payments (the instalments).

Institutional Clients:
The sales department of a securities firm serves two categories of clients. The institutional segment deals with banks, insurance companies, trust companies, pension fund managers and large corporations. The retail branch deals with individual investors.

Institutional investors: Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Institutionalization: The gradual domination of financial markets by institutional investors, as opposed to individual investors. This process has occurred throughout the industrialized world.

Instruments: Financial securities, such as money market instruments or capital market instruments.

Insurance claim: A request for payment of benefits under the terms of an insurance policy.

Insurance claimant: A person or party requesting payment of benefits under the terms of an insurance policy.

Insurance Companies Act:
Federal legislation governing the structure and operation of federally incorporated or registered insurance companies in Canada.

Insurance company:
A financial institution (either federally or provincially regulated) that engages primarily in the business of insuring risks. Insurance companies are generally divided into two categories: life and health insurers, and property and casualty insurers.

Insurance policy:
A written document that serves as evidence of insurance coverage and contains pertinent information about the benefits, coverage and owner, as well as its associated obligations.

Insurance principle:
The law of averages. The average outcome for many independent trials of an experiment will approach the expected value of the experiment.

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

Insured plans: Defined benefit pension plans that are guaranteed by life insurance products.

Intangible asset: A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets.

Integer programming:
Variant of linear programming whereby the solution values must be integers.

Interac Association:
National organization of financial institutions and technology service providers, allowing Canadians convenient access to their deposit accounts through the shared network of automated banking machines and Interac Direct Payment, the debit card service.

Interac Direct Payment: A means of paying for goods and services with a debit card that authorizes transfer of the funds, via the Interac Direct Payment network, directly from the purchaser's account to the merchant's account.

Intercompany loan: Loan made by one unit of a corporation to another unit of the same corporation.

Intercompany transaction: Transaction carried out between two units of the same corporation.

The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest coverage ratio:
The ratio of the earnings before interest and taxes to the annual interest expense. This ratio measures a firm's ability to pay interest.

Interest coverage test:
A debt limitation that prohibits the issuance of additional long-term debt if the issuer's interest coverage would, as a result of the issue, fall below some specified minimum.

Interest equalization tax:
Tax on foreign investment by residents of the U.S. which was abolished in 1974.

Interest income:
The type of income generated by bank deposits, bonds, GIC'S, treasury bills, fixed income investments, strip bonds and strip coupons.

Interest payments:
Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest on interest:
Interest earned on reinvestment of each interest payment on money invested. See: compound interest.

Interest-only strip (IO):
A security based solely on the interest payments from a pool of mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop and the value of the IO falls to zero.

Interest rate: Rate charged or paid for the use of money, normally expressed as a percentage.

Interest rate agreement:
An agreement whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).

Interest rate cap:
Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate.

Interest rate floor:
An interest rate agreement in which payments are made when the reference rate falls below the strike rate.

Interest rate on debt:
The firm's cost of debt capital.

Interest rate parity theorem: Interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate.

Interest rate risk:
The risk that a security's value changes due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates.

Interest rate swap:
A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable.

Interest subsidy: A firm's deduction of the interest payments on its debt from its earnings before it calculates its tax bill under current tax law.

Interest tax shield: The reduction in income taxes that results from the tax-deductibility of interest payments.

Interim Certificates:
When a new issue of a security is marketed, temporary certificates, called interim certificates, are sometimes delivered. These are later exchanged for permanent or definitive certificates.

Interim Statements:
These are financial statements issued for a certain period within a fiscal year, such as a three-month or first quarter interim statement.

Inter-market sector spread:
The spread between the interest rate offered in two sectors of the bond market for issues of the same maturity.

Inter-market spread swaps: An exchange of one bond for another based on the manager's projection of a realignment of spreads between sectors of the bond market.

Typically 1-10 years.

Investment through a financial institution.

Internal finance: Finance generated within a firm by retained earnings and depreciation.

Internal growth rate:
Maximum rate a firm can expand without outside source of funding. Growth generated by cash flows retained by company.

Internal market:
The mechanisms for issuing and trading securities within a nation, including its domestic market and foreign market.

Internal measure: The number of days that a firm can finance operations without additional cash income.

Internal rate of return:
Dollar-weighted rate of return. Discount rate at which the net present value (NPV) investment is zero. The rate at which a bond's future cash flows, discounted back to today, equals its price.

Internally efficient market:
Operationally efficient market.

International Bank for Reconstruction and Development - IBRD or World Bank:
International Bank for Reconstruction and Development makes loans at nearly conventional terms to countries for projects of high economic priority.

International Banking Facility (IBF):
International Banking Facility. A branch that an American bank establishes in the United States to do Eurocurrency business.

International bonds:
A collective term that refers to global bonds, Eurobonds, and foreign bonds.

International Depository Receipt (IDR):
A receipt issued by a bank as evidence of ownership of one or more shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR structure is that the corporation does not have to comply with all the regulatory issuing requirements of the foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depository Receipt (ADR).

International diversification:
The attempt to reduce risk by investing in the more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns.

International finance subsidiary:
A subsidiary incorporated in the U.S., usually in Delaware, whose sole purpose was to issue debentures overseas and invest the proceeds in foreign operations, with the interest paid to foreign bondholders not subject to U.S. withholding tax. The elimination of the corporate withholding tax has ended the need for this type of subsidiary.

International Fisher effect: States that the interest rate differential between two countries should be an unbiased predictor of the future change in the spot rate.

International fund: A mutual fund that can invest only outside the United States.

International Monetary Fund:
An organization founded in 1944 to oversee exchange arrangements of member countries and to lend foreign currency reserves to members with short-term balance of payment problems.

International Monetary Market (IMM):
A division of the CME established in 1972 for trading financial futures.

International Swaps & Derivatives Association (ISDA) Agreements:
Standardized legal documents used by institutions entering into over the counter derivative contracts.

Intramarket sector spread:
The spread between two issues of the same maturity within a market sector. For instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility corporate bonds.

Intrinsic Value:
That portion of a warrant, right or call option's price that represents the amount by which the market price of the underlying security exceeds the price at which the warrant, right or call option may be exercised. The intrinsic value of a put is calculated as the amount by which the underlying security's market value is below the price at which the put option can be exercised.

Intrinsic value of an option:
The amount by which an option is in-the-money. An option which is not in-the-money has no intrinsic value.

Intrinsic value of a firm:
The present value of a firm's expected future net cash flows discounted by the required rate of return.

For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets. For security firms: securities bought and held by a broker or dealer for resale.

Inventory loan:
A secured short-term loan to purchase inventory. The three basic forms are a blanket inventory lien, a trust receipt, and field warehousing financing.

Inventory turnover: The ratio of annual sales to average inventory which measures the speed that inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.

Inventory Turnover Ratio:
This is the cost of goods sold by a company, divided by its inventory. The ratio may also be expressed in terms of the number of days required to sell current inventory by dividing the ratio into 365. This ratio indicates the efficiency of management in turning over the company's inventory and can be used to compare with other companies in the same field.

Inverse floating rate note: A variable rate security whose coupon rate increases as a benchmark interest rate declines.

Inverted market: A futures market in which the nearer months are selling at price premiums to the more distant months.

Money put into a form that earns a return or profit. In essence, the money is being used to make money.

Investment Advisor:
This is a person employed by an investment dealer who provides investment advice to clients and executes trades on their behalf in securities and other investment products. Investment advisors must attain set educational qualifications, follow certain rules and regulations and be registered by the securities commission in the province in which he or she works.

Investment bank:
Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. Underwriters.

Investment Counsellor:
A specialist in the investment industry paid by fee to provide advice and research to investors with larger sized accounts.

Investment dealer:
A firm that trades securities for its clients and offers other investment services. Also known as a securities dealer or brokerage house.

Investment Dealers Association (IDA):
Formed in 1916, the IDA is the national self-regulatory organization of the securities industry. It monitors and regulates the activities of investment dealers, and promotes the interests of the securities industry.

Investment Dealers Association of Canada (IDA): The Canadian investment industry's national trade association and self-regulatory organization. The IDA represents and polices the activities of approximately 114 member firms.

Investment decisions: Decisions concerning the asset side of a firm's balance sheet, such as the decision to offer a new product.

Investment grade bonds:
A bond that is assigned a rating in the top four categories by commercial credit rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moody's classifies investment grade bonds as Ba or higher.

Investment income:
The revenue from a portfolio of invested assets.

Investment income: The income received from investment in securities and property. It includes rent from property, dividends from shares in corporations, and interest from bonds, guaranteed investment certificates, bank accounts, certificates of deposit, Treasury bills and other financial securities.

Investment management: Also called portfolio management and money management, the process of managing money.

Investment manager: Also called a portfolio manager and money manager, the individual who manages a portfolio of investments.

Investment product line (IPML):
The line of required returns for investment projects as a function of beta (non-diversifiable risk).

Investment tax credit: Proportion of new capital investment that can be used to reduce a company's tax bill (abolished in 1986).

Investment trust:
A closed-end fund regulated by the Investment Company Act of 1940. These funds have a fixed number of shares which are traded on the secondary markets similarly to corporate stocks. The market price may exceed the net asset value per share, in which case it is considered at a "premium." When the market price falls below the NAV/share, it is at a "discount." Many closed-end funds are of a specialized nature, with the portfolio representing a particular industry, country, etc. These funds are usually listed on US and foreign exchanges.

As a discipline, the study of financial securities, such as stocks and bonds, from the investor's viewpoint. This area deals with the firm's financing decision, but from the other side of the transaction.

Investor: The owner of a financial asset.

Investor fallout: In the mortgage pipeline, risk that occurs when the originator commits loan terms to the borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.

Investor relations:
The process by which the corporation communicates with its investors.

Investor's equity: The balance of a margin account.

Invoice: Bill written by a seller of goods or services and submitted to the purchaser.

Invoice billing:
Billing system in which the invoices are sent off at the time of customer orders are all separate bills to be paid.

Invoice date:
Usually the date when goods are shipped. Payment dates are set relative to the invoice date.

Invoice price:
The price that the buyer of a futures contract must pay the seller when a Treasury Bond is delivered.

In-house processing float:
Refers to the time it takes the receiver of a check to process the payment and deposit it in a bank for collection.

In-substance defeasance:
Defeasance whereby debt is removed from the balance sheet but not cancelled.

In the box:
This means that a dealer has a wire receipt for securities indicating that effective delivery on them has been made.

Involuntary liquidation preference: A premium that must be paid to preferred or preference stockholders if the issuer of the stock is forced into involuntary liquidation.

IRA/Keogh accounts:
Special accounts where you can save and invest and the taxes are deferred until money is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of contributions. Withdrawals of tax deferred contributions are taxed as income, including the capital gains from such accounts.

Irrational call option:
The implied call imbedded in the MBS. Identified as irrational because the call is sometimes not exercised when it is in the money (interest rates are below the threshold to refinance). Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

Irrelevance result:
The Modigliani and Miller theorem that a firm's capital structure is irrelevant to the firm's value.

International Swap Dealers Association. Formed in 1985 to promote uniform practices in the writing, trading, and settlement of swaps and other derivatives.

ISMA: International Security Market Association. ISMA is a Swiss law association located in Zurich that regroups all the participants on the Eurobond primary and secondary markets. Establishes uniform trading procedures in the international bond markets.

Issue: A particular financial asset.

Any of a company's securities, or the act of distributing them. Issued shares refer to that part of the authorized shares which have been issued for sale by the corporation. The total number of authorized shares does not have to be issued.

Issued share capital:
Total amount of shares that are in issue.

An entity that issues a financial asset.

Issuer bid: An offer by an issuer to buy back some of its own securities. This is usually done because the company feels the market is undervaluing its securities.