Glossary (D-K)
D
Dealing room
A secure and continually monitored room set up by the vendor as part of a sale process in order to give potential buyers and their advisors access to detailed confidential information needed in the preparation of their bids.
Debt capital markets (DCM)
The area of an investment bank responsible for the issuance and pricing of bonds and other debt securities. DCM is involved in the bond product, providing credit rating advice for corporates, organising bond finance using a pool of investors and offering derivative solutions for risk management. This area also trades bonds in the secondary marketplace. DCM also includes the securitisation businesses, which are involved in repackaging and selling financial or corporate assets to the market place.
Derivatives
A financial instrument, the price of which has a strong correlation with a related or underlying commodity, currency or financial instrument. The most common derivatives are futures contracts and options.
Distressed debt
Non-performing debt. Usually companies in financial distress that have probably defaulted on their bond interest payments (not on the face value of the bond). Purchasers will buy this debt at a discount to the face value and resell this debt at a premium.
E
Equity
A general term for the ordinary shares of a company, especially a publicly owned quoted company. Non-listed companies’ equity is typically referred to as private equity. In the event of liquidation, the ordinary shareholders are entitled to share out the assets remaining after all other creditors (including holders of preference shares) have been paid out.
Emerging markets
Financial markets in newly developing countries, usually a small market with a short operating history.
Emerging markets sovereign
An Emerging Market (EM) sovereign is a relatively newly financially (re)formed country. Investing in EM Sovereign bonds like Russia, Turkey or Brazil, promises high return but also a high(er) risk of default of the country.
Eurobond
An international bond issued in Europe or elsewhere outside the country in whose currency the value is stated.
Exotic
A term used to highlight the complexity of a product. New variations are born every day and there are exotic swaps, exotic options etc. The term ‘exotic’ distinguishes the product from the more basic version, which is known as ‘vanilla’ (i.e. vanilla swap or vanilla option) because it is simple.
F
Financial engineering
Combining or dividing existing products to create new financial products.
Fixed income
These are financial instruments that make fixed payments of return over their duration and upon their maturity, such as bonds.
Foreign exchange
Often referred to as FX or Forex, these are the currencies of foreign countries. Foreign exchange is bought and sold in foreign exchange markets. Firms or organisations require foreign exchange to purchase goods from abroad or for purposes of investment or speculation.
Forward/Forwards contracts
Sometimes referred to as forwards, this is a contract obligating one party to buy and another party to sell foreign currency, security, commodity or other financial instrument at a specific future date.
Foundation
An entity which exists to support a charitable institution and which is funded by an endowment or donations.
Future/Futures contracts
An agreement to buy or sell a fixed quantity of a particular commodity, currency, or security for delivery at a fixed date in the future at a fixed price. Unlike an option, a futures contract involves a definite purchase or sale and not an option to buy or sell; it therefore may entail a potentially unlimited loss. However, futures provide an opportunity for those who must purchase goods regularly to hedge against the price. In London, futures are traded in a variety of markets. Financial futures are traded on the London International Financial Futures and Options Exchange; the London Commodity Exchange which deals with shipping and cocoa, coffee and other foodstuffs; the London Metal Exchange with metals; and the International Petroleum Exchange with oil. In these futures markets in many cases actual goods do not pass between dealers, a bought contract being cancelled out by an equivalent sale contract, and vice versa; money differences arising as a result are usually settled through a clearing house.
G
GAAP
Generally accepted accounting principles which incorporates a widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as established by the Financial Accounting Standards Board.
Guarantor liability
Guarantor liability (Gewaehrtragerhaftung) is one of two forms of state guarantee previously enjoyed by Landesbanks. This is where the State Government, independently of its obligations as a shareholder or owner of the Landesbank in question, guarantees the debts of that Landesbank. The other form of guarantee, Anstaltslast or insititutional liability, arises out of the Government’s obligations as a shareholder.
H
High yield
Often used to describe investments with high rates of return. Generally used to refer to a high-risk bond (or "junk bond") with a credit rating that is below investment grade, i.e. it is ranked low by a rating agency because they have a relatively high chance of default, and therefore have to offer higher returns. Similarly, a stock will offer a high dividend yield in order to compensate for lower expected capital gains, for example a large company in a mature industry which is no longer growing.
I
Initial public offering (IPO)
This is a company’s first offering of stock or shares to the public. IPO’s are initially an opportunity for the existing investors and participating venture capitalists to make big profits, since for the first time their shares will be given a market value reflecting expectations for the company’s future growth.
Interest rate and currency derivatives
Derivatives are artificial financial instruments such as an options, forwards or futures; they are designed to allow a trader to hedge their natural position. In this case the instruments can be used to hedge against changes in foreign exchange or interest rates. Although designed for hedging purposes, derivatives can be bought without an underlying position in order to take a directional view on which way rates are going to move.
Interest rate swaps
When borrowing money, a customer has a choice of two ways to pay their interest: either a fixed rate, which is unaffected by rises and falls in the underlying base rate, or a floating rate, which will be a fixed spread over LIBOR (London Interbank Offered Rate - a benchmark variable rate of interest). The first takes the risk that interest rates might go down, the second that they will increase. The above is an agreement between two counterparties to swap interest rate types and thus their risk exposure to interest rates.
Institutional investors
These large investors that buy and sell stocks and bonds in large volumes include mutual funds, banks, insurance companies, pension funds and others. As a group, they hold a large percentage of any given bond or equity issue.
Institutional liability
Institutional liability (Anstaltslast) means the obligations of the shareholders of an institution, i.e. their duties and what liabilities they have to take responsibility for in the event of default. It is the counterpart of Guarantor Liability (Gewaehrtragerhaftung). The special form of institutional liability for owners of Landesbanks and Sparkassen was changed as part of the settlement effective July 2005 to make it consistent with duties of shareholders in a public (llimited liability) company.