Glossary

Dividends

The payments − typically semi-annually − to investors in shares (equities).

Equity finance

The finance raised by the issuance of shares (also known as equities).

Equity risk premium

The difference between the rate of return required on equity and the rate of return required on a risk-free investment.

Fisher equation

This equation establishes the relationship between nominal and real interest rates under price inflation.

Gordon growth model

A model which values a stock by discounting future dividends. This is a special case of the dividend valuation model in which it is assumed that future dividends will grow at a constant rate.

Government bonds

A bond issued by a government, thus representing a loan to a government. This type of investment is normally considered low-risk (depending on the government).

Haircut

The process for determining the (percentage) deduction in the market value of securities to allow for the potential loss on investments arising from possible future movements in market prices. So if a security is currently valued at €10 million an investor may apply a haircut of, say, 10% or €1 million (taking the post-haircut value to €9 million) when assessing, for prudence sake, what it may be worth in the future.

International Monetary Fund (IMF)

One of the Bretton Woods’ conference institutions which was created at the end of the Second World War. It is an inter-governmental organisation. Its objectives are to stabilise international exchange rates and facilitate economic development through the encouragement of liberalising economic policies. The fund offers emergency funding to countries which experience balance of payments problems, in particular to those countries who are unable to meet their international financial obligations, are short of foreign currency and unable to raise funds in the international debt markets at a reasonable or manageable cost. Loans are offered with varying levels of conditionality.

Interest

The payment − typically annual or half-yearly − by the debt issuer to bond investors and other lenders.

Nominal (value)

The face value (or par value) of an asset or liability.

Present value

The present value of a sum is the amount that would have to be received now to be worth the same as an amount received in the future. Future flows are converted to their present value by discounting them using a discount factor.

Real rate of return

The rate of return from an asset after adjusting for price inflation.

Risk-free rate

The rate of return offered to an investor on a financial asset in respect of which there is no material risk of default by the issuer (e.g. government bond).

Standard deviation

A measure of volatility. It is derived by calculating the square root of the sum of the squares of the differences between actual outcomes and the mean (or average) outcome

Term structure of interest rates

The set of interest rates required by investors on loans of different maturity but equivalent credit risk.

Treasury bill

A short-term (less than one year) security issued by national governments (such as the US and UK governments) as a means of funding short-term cash requirements. This type of security has historically been used as a proxy for a risk free investment.

Yield curve

A line graph with maturity term on the ‘x-axis’ and yield on the ‘y-axis’ that links the yields (or market rates of return) for different terms to maturity. A yield curve where yields rise the longer the term to maturity is known as a ‘positive yield curve’, 'a rising', or 'an upward sloping yield curve'. A yield curve where yields fall the longer the term to maturity is known as a ‘negative’, 'falling', or an ‘inverted’ yield curve. A yield curve where interest rates have the same level across maturities is known as a 'flat' yield curve. Finally, a yield curve where interest rates in the middle maturities are either higher or lower than both the short-and long-term maturities is known a 'humped' yield curve. See also Yield to maturity.

Yield to maturity

The annualised total return of a bond, including both interest (or coupon) payments and the principal repaid at maturity.