Glossary of Terms

"Explaining all those new words" This document explains the meaning of all the words that may be used throughout the advice process. If you cannot find the definition of the word you are looking for in this document please do not hesitate to ask.

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AAA-rating: The best credit rating Bankruptcy: A legal process in which Bull market: A bull market is one in that can be given to a borrower's the assets of a borrower who cannot which prices are generally rising and debts, indicating that the risk of a repay its debts - which can be an investor confidence is high. borrower defaulting is minuscule. individual, a company or a bank - are valued, and possibly sold off Capital: For investors, it refers to Administration: A rescue mechanism (liquidated), in order to repay debts. their stock of wealth, which can be for UK companies in severe trouble. It put to work in order to earn income. allows them to continue as a going Where the borrower's assets are For companies, it typically refers to concern, under supervision, giving insufficient to repay its debts, the sources of financing such as newly them the opportunity to try to work debts have to be written off. This issued shares. their way out of difficulty. A firm in means the lenders must accept that administration cannot be wound up some of their loans will never be For banks, it refers to their ability to without permission from a court. repaid, and the borrower is freed of its absorb losses in their accounts. Banks debts. Bankruptcy varies greatly from normally obtain capital either by AGM: An annual general meeting, one country to another, some issuing new shares, or by keeping which companies hold each year for countries have laws that are very hold of profits instead of paying them shareholders to vote on important friendly to borrowers, while others are out as dividends. If a bank writes off a issues such as dividend payments and much more friendly to lenders. loss on one of its assets - for appointments to the company's board example, if it makes a loan that is not of directors. If an emergency decision Base rate: The key interest rate set repaid - then the bank must also write is needed - for example in the case of by the Bank of England. It is the off a corresponding amount of its a takeover - a company may also call overnight interest rate that it charges capital. If a bank runs out of capital, an exceptional general meeting of to banks for lending to them. The then it is insolvent, meaning it does shareholders or EGM. base rate - and expectations about not have enough assets to repay its how the base rate will change in the debts. Article 50: Is the name of the formal future - directly affect the interest legal process to leave the European rates at which banks are willing to Capital adequacy ratio: A measure Union (EU) - but it's never been used lend money in sterling. of a bank's ability to absorb losses. It and it's pretty vague is defined as the value of its capital Basis point: One hundred basis divided by the value of risk-weighted Assets: Things that provide income points make up a percentage point, so assets (ie taking into account how or some other value to their owner. an interest rate cut of 25 basis points risky they are). A low capital might take the rate, for example, adequacy ratio suggests that a bank  Fixed assets (also known as from 3% to 2.75%. has a limited ability to absorb losses, long-term assets) are things given the amount and the riskiness of that have a useful life of more BBA: The British Bankers' Association the loans it has made. than one year, for example is an organisation representing the buildings and machinery; major banks in the UK - including A banking regulator - typically the there are also intangible fixed foreign banks with a major presence central bank - sets a minimum capital assets, like the good in London. It is responsible for the adequacy ratio for the banks in each reputation of a company or daily Libor interest rate which country, and an international brand. determines the rate at which banks minimum standard is set by the BIS.  Current assets are the things lend to each other. A bank that fails to meet this that can easily be turned into minimum standard must be cash and are expected to be Bear market: In a bear market, recapitalised, for example by issuing sold or used up in the near prices are falling and investors, new shares. future. fearing losses, tend to sell. This can create a self-sustaining downward Capitulation (market:. The point Austerity: Economic policy aimed at spiral. when a flurry of panic selling induces reducing a government's deficit (or a final collapse - and ultimately a borrowing). Austerity can be achieved Bill: A debt security- or more simply bottoming out - of prices. through increases in government an IOU. It is very similar to a bond, revenues - primarily via tax rises - but has a maturity of less than one Carry trade: Typically, the borrowing and/or a reduction in government year when first issued. of currency with a low interest rate, spending or future spending converting it into currency with a high commitments. Bond: A debt security, or more interest rate and then lending it. The simply, an IOU. The bond states when most common carry trade currency Bailout: The financial rescue of a a loan must be repaid and what used to be the yen, with traders struggling borrower. A bailout can be interest the borrower (issuer) must seeking to benefit from Japan's low achieved in various ways: pay to the holder. They can be issued interest rates. Now the dollar, euro by companies, banks or governments and pound can also serve the same  providing loans to a borrower to raise money. Banks and investors purpose. The element of risk is in the that markets will no longer buy and trade bonds. fluctuations in the currency market. lend to  guaranteeing a borrower's BRIC: An acronym used to describe debts the fast-growing economies of Brazil,  guaranteeing the value of a Russia, India and China. borrower's risky assets  providing help to absorb Brexit: is an abbreviation for "British potential losses, such as in a exit," referring to the UK's decision in bank recapitalisation a June 23, 2016 referendum to leave the European Union (EU).

Collateralised debt obligations Credit crunch: A situation where dollars - a policy that has the effect (CDOs): A financial structure that banks and other lenders all cut back of keeping the yuan weak. groups individual loans, bonds or their lending at the same time, other assets in a portfolio, which can because of widespread fears about the Debt restructuring: A situation in then be traded. In theory, CDOs ability of borrowers to repay. which a borrower renegotiates the attract a stronger credit rating than terms of its debts, usually in order to individual assets due to the risk being If heavily-indebted borrowers are cut reduce short-term debt repayments more diversified. But as the off from new lending, they may find it and to increase the amount of time it performance of many assets fell impossible to repay existing debts. has to repay them. If lenders do not during the financial crisis, the value of Reduced lending also slows down agree to the change in repayment many CDOs was also reduced. economic growth, which also makes it terms, or if the restructuring results in harder for all businesses to repay an obvious loss to lenders, then it is Commercial paper: Unsecured, their debts. generally considered a default by the short-term loans taken out by borrower. However, restructuring can companies. The funds are typically Credit default swap (CDS): A also occur through a debt swap - a used for working capital, rather than financial contract that provides voluntary agreement by lenders to fixed assets such as a new building. insurance-like protection against the switch existing debts for new debts The loans take the form of IOUs that risk of a third-party borrower with easier repayment terms - in can be bought and traded by banks defaulting on its debts. For example, a which case it can be very hard to and investors, similar to bonds. bank that has made a loan to Greece determine whether the restructuring may choose to hedge the loan by counts as a default. Commercial Property: Also buying CDS protection on Greece. called commercial real estate, Default: Strictly speaking, a default investment or income property. The bank makes periodic payments to occurs when a borrower has broken refers to buildings or land intended to the CDS seller. If Greece defaults on the terms of a loan or other debt, for generate a profit, either from capital its debts, the CDS seller must buy the example if a borrower misses a gain or rental income. loans from the bank at their full face payment. The term is also loosely value. CDSs are not just used for used to mean any situation that Commodities: are products that, in hedging - they are used by investors makes clear that a borrower can no their basic form, are all the same so it to speculate on whether a borrower longer repay its debts in full, such as makes little difference from whom you such as Greece will default. bankruptcy or a debt restructuring. buy them. That means that they can have a common market price. You Credit rating: The assessment given A default can have a number of would be unlikely to pay more for iron to debts and borrowers by a ratings important implications. If a borrower ore just because it came from a agency according to their safety from is in default on any one debt, then all particular mine, for example. an investment standpoint - based on of its lenders may be able to demand their creditworthiness, or the ability of that the borrower immediately repay Contracts to buy and sell commodities the company or government that is them. Lenders may also be required usually specify minimum common borrowing to repay. to write off their losses on the loans standards, such as the form and they have made. purity of the product, and where and Ratings range from AAA, the safest, when it must be delivered. down to D, a company that has Deficit: The amount by which already defaulted. Ratings of BBB- or spending exceeds income over the The commodities markets range from higher are considered "investment course of a year. soft commodities such as sugar, grade". Below that level, they are cotton and pork bellies to industrial considered "speculative grade" or In the case of trade, it refers to metals such as iron and zinc. more colloquially as junk. exports minus imports. In the case of the government budget, it equals the Core inflation: A measure of CPI Currency peg: A commitment by a amount the government needs to inflation that strips out more volatile government to maintain its currency borrow during the year to fund its items (typically food and energy at a fixed value in relation to another spending. The government's "primary" prices). The core inflation rate is currency. deficit means the amount it needs to watched closely by central bankers, as borrow to cover general government it tends to give a clearer indication of Sometimes pegs are used to keep a expenditure, excluding interest long-term inflation trends. currency strong, in order to help payments on debts. The primary reduce inflation. In this case, a central deficit therefore indicates whether a Correction (market): A short-term bank may have to sell its reserves of government will run out of cash if it is drop in stock market prices. The term foreign currency and buy up domestic no longer able to borrow and decides comes from the notion that, when this currency in order to defend the peg. If to stop repaying its debts. happens, overpriced or underpriced the central bank runs out of foreign stocks are returning to their "correct" currency reserves, then the peg will Deflation: Negative inflation - that is, values. collapse. when the prices of goods and services across the whole economy are falling CPI: The Consumer Prices Index is a Pegs can also be used to help keep a on average. measure of the price of a bundle of currency weak in order to gain a goods and services from across the competitive advantage in trade and economy. It is the most common boost exports. China has been measure used to identify inflation in a accused of doing this. country. CPI is used as the target measure of inflation by the Bank of The People's Bank of China has England and the ECB. accumulated trillions of dollars in US government bonds, because of its policy of selling yuan and buying Deleveraging: A process whereby EBRD: The European Bank for Eurobond: A term increasingly used borrowers reduce their debt loads. Reconstruction and Development is a for the idea of a common, jointly- Primarily this occurs by repaying similar institution to the World Bank, guaranteed bond of the Eurozone debts. It can also occur by set up by the US and European governments. It has been mooted as bankruptcies and debt defaults, or by countries after the fall of the Berlin a solution to the Eurozone debt crisis, the borrowers increasing their Wall to assist in economic transition in as it would prevent markets from incomes, meaning that their existing Eastern Europe. Recently the EBRD's differentiating between the debt loads become more manageable. remit has been extended to help the creditworthiness of different Western economies are experiencing Arab countries that emerged from government borrowers. widespread deleveraging, a process dictatorship in 2011. associated with weak economic Confusingly and quite separately, growth that is expected to last years. ECB: The European Central Bank is "Eurobond" also refers to a bond the central bank responsible for issued in a country which isn't Households are deleveraging by monetary policy in the Eurozone. It is denominated in that country's repaying mortgage and credit card headquartered in Frankfurt and has a currency. For example, this is used to debts. Banks are deleveraging by mandate to ensure price stability - refer to bonds in US dollars issued in cutting back on lending. Governments which is interpreted as an inflation Europe. are also beginning to deleverage via rate of no more than 2% per year. austerity programmes - cutting Eurozone: The 17 countries that spending and increasing taxation. EIB: The European Investment Bank share the euro. is the European Union's development Derivative: A financial contract which bank. It is owned by the EU's member Federal Reserve: The US central provides a way of investing in a governments, and provides loans to bank. particular product without having to support pan-European infrastructure, own it directly. For example, a stock economic development in the EU's Financial Policy Committee: A new market futures contract allows poorer regions and environmental committee at the Bank of England set investors to make bets on the value of objectives, among other things. up in 2010-11 in response to the a stock market index such as the financial crisis. It has overall FTSE 100 without having to buy or ESM: The European Stability responsibility for ensuring major risks sell any shares. The value of a Mechanism is a 500bn-euro rescue do not build up within the UK financial derivative can depend on anything fund that will replace the EFSF and system. from the price of coffee to interest the EFSM from June 2013. Unlike the rates or what the weather is like. EFSF, the ESM is a permanent bail-out Financial transaction tax: See arrangement for the Eurozone. Unlike Tobin tax. Credit derivatives such as credit the EFSM, the ESM will only be backed default swaps depend on the ability of by members of the Eurozone, and not Fiscal policy: The government's a borrower to repay its debts. by other European Union members borrowing, spending and taxation Derivatives allow investors and banks such as the UK. decisions. If a government is worried to hedge their risks, or to speculate that it is borrowing too much, it can on markets. Futures, forwards, swaps EFSF: The European Financial engage in austerity; raising taxes and options are all types of Stability Facility is currently a and/or cutting spending. Alternatively, derivatives. temporary fund worth up to 440bn if a government is afraid that the euros set up by the Eurozone in May economy is going into recession it can Dividends: An income payment by a 2010. Following a previous bail-out of engage in fiscal stimulus, which can company to its shareholders, usually Greece, the EFSF was originally include cutting taxes, raising spending linked to its profits. intended to help other struggling and/or raising borrowing. Eurozone governments, and has since Double-dip recession: A recession provided rescue loans to the Irish FTSE 100: An index of the 100 that experiences a limited recovery Republic and Portugal. More recently, companies listed on the London Stock then dips back into recession. The the Eurozone agreed to broaden the Exchange with the biggest market exact definition is unclear, as the EFSF's mandate, for example by value. The index is revised every definition of what counts as a allowing it to support banks. three months. recession varies between countries. EFSM: The European Financial Fundamentals: determine a A widely-accepted definition is one Stability Mechanism is 60bn euros of company, currency or security's value where the initial recovery fails to take money pledged by the member in the long-term. A company's total economic output back up to the governments of the European Union, fundamentals include its assets, debt, peak seen before the recession began. including 7.5bn euros pledged by the revenue, earnings and growth. UK. The EFSM has been used to loan EBA: The European Banking Authority money to the Irish Republic and Futures: A futures contract is an is a pan-European regulator Portugal. It will be replaced by the agreement to buy or sell a commodity responsible created in 2010 to ESM from 2013. at a predetermined date and price. It oversee all banks within the European could be used to hedge or to Union. Its powers are limited, and it Equity: The value of a business or speculate on the price of the depends on national bank regulators investment after subtracting any commodity. Futures contracts are a such as the UK's Financial Services debts owed by it. The equity in a type of derivative, and are traded on Authority to implement its company is the value of all its shares. an exchange. recommendations. It has already been In a house, your equity is the amount active in laying down new rules on your house is worth minus the G7: The group of seven major bank bonuses and arranging the amount of mortgage debt that is industrialised economies, comprising European bank stress tests. outstanding on it. the US, UK, France, Germany, Italy, Canada and Japan.

G8: The G7 plus Russia. commission reported back in more highly leveraged you are. September 2011, and called for: Leverage can increase both gains and G20: The G8 plus developing  a ring-fence, to separate and losses. Deleveraging means reducing countries that play an important role safeguard the activities of the amount you are borrowing. in the global economy, such as China, banks that were deemed India, Brazil and Saudi Arabia. It essential to the UK economy Liability: A debt or other form of gained in significance after leaders  measures to increase the payment obligation, listed in a agreed how to tackle the 2008-09 transparency of bank accounts company's accounts. financial crisis and recession at G20 and competition among gatherings. banks, including the creation Libor: London Inter Bank Offered of a new major High Street Rate. The rate at which banks in GDP: Gross domestic product. A bank London lend money to each other for measure of economic activity in a  much higher capital the short-term in a particular country, namely of all the services requirements for the big currency. A new Libor rate is and goods produced in a year. There banks so that they can better calculated every morning by financial are three main ways of calculating absorb future losses data firm Thomson Reuters based on GDP - through output, through income interest rates provided by members of and through expenditure. Inflation: The upward price the British Bankers Association. movement of goods and services. Haircut: A reduction in the value of a Limited liability: Confines an troubled borrower's debts, imposed Insolvency: A situation in which the investor's loss in a business to the on, or agreed with, its lenders as part value of a borrower's assets is not amount of capital they invested. If a of a debt restructuring. enough to repay all of its debts. If a person invests £100,000 in a borrower can be shown to be company and it goes under, they will Hedge fund: A private investment insolvent, it normally means they can lose only their investment and not fund which uses a range of be declared bankrupt by a court. more. sophisticated strategies to maximise returns including hedging, leveraging Investment bank: Investment banks Liquidation: A process in which and derivatives trading. Authorities provide financial services for assets are sold off for cash. around the world are working on ways governments, companies or extremely Liquidation is often the outcome for a to regulate them. rich individuals. They differ from company deemed irretrievably loss- commercial banks where you have making. In that case, its assets are Hedging: Making an investment to your savings or your mortgage. sold off individually, and the cash reduce the risk of price fluctuations to proceeds are used to repay its the value of an asset. Airlines often Traditionally investment banks lenders. In liquidation, a company's hedge against rising oil prices by provided underwriting, and financial lenders and other claimants are given agreeing in advance to buy their fuel advice on mergers and acquisitions, an order of priority. Usually the tax at a set price. In this case, a rise in and how to raise money in the authorities are the first to be paid, price would not harm them - but nor financial markets. The term is also while the company's shareholders are would they benefit from any falls. commonly used to describe the more the last, typically receiving nothing. risky activities typically undertaken by IIF: The Institute of International such firms, including trading directly Liquidity: How easy something is to Finance is a global trade association of in financial markets for their own convert into cash. Your current the major banks. account. account, for example, is more liquid than your house. If you needed to sell IMF: The International Monetary Fund Junk bond: A bond with a credit your house quickly to pay bills you is an organisation set up after World rating of BB+ or lower. These debts would have to drop the price War II to provide financial assistance are considered very risky by the substantially to get a sale. to governments. Since the 1980s, the ratings agencies. Typically the bonds IMF has been most active in providing are traded in markets at a price that Liquidity crisis A situation in which it rescue loans to the governments of offers a very high yield(return to suddenly becomes much more difficult developing countries that run into investors) as compensation for the for banks to obtain cash due to a debt problems. higher risk of default. general loss of confidence in the financial system. Since the financial crisis, the IMF has Keynesian economics: The also provided rescue loans, alongside economic theories of John Maynard Investors (and, in the case of a bank the European Union governments and Keynes. In modern political parlance, run, even ordinary depositors) may the ECB, to Greece, the Irish Republic the belief that the state can directly withdraw their cash from banks, while and Portugal. The IMF is traditionally - stimulate demand in a stagnating banks may stop lending to each other, and of late controversially - headed by economy, for instance, by borrowing if they fear that some banks could go a European. money to spend on public works bust. Because most of a bank's money projects such as roads, schools and is tied up in loans, even a healthy Impairment charge: The amount hospitals. bank can run out of cash and collapse written off by a company when it in a liquidity crisis. realises that it has valued an asset Lehman Brothers: A US investment more highly than it is actually worth. bank, whose collapse in September Central banks usually respond to a 2008 sparked the most intense phase liquidity crisis by acting as "lender of Independent Commission on of the financial crisis. last resort" and providing emergency Banking: A commission chaired by cash loans to the banks. economist Sir John Vickers set up in Leverage: or gearing, means using 2010 by the UK government in order debt to supplement investment. The to make recommendations on how to more you borrow on top of the funds reform the banking system. The (or equity) you already have, the Liquidity trap: A situation described Money markets: Global markets Profit warning: When a company by economist John Maynard Keynes in dealing in borrowing and lending on a issues a statement indicating that its which nervousness about the short-term basis. profits will not be as high as it had economy leads everybody to cut back expected. Also profits warning. on their spending and to hold cash, Mortgage-backed securities even if the cash earns no interest. The (MBS): Banks repackage debts from Quantitative easing: Central banks widespread fall in spending a number of mortgages into MBS, increase the supply of money by undermines the economy, which in which can be bought and traded by "printing" more. In practice, this may turn makes households, banks and investors. By selling off their mean purchasing government bonds companies even more nervous about mortgages in the form of MBS, it frees or other categories of assets, using spending and investing their money. the banks up to lend to more the new money. homeowners. The problem becomes particularly Rather than physically printing more intractable when - as in Japan over MPC: The Monetary Policy Committee notes, the new money is typically the last 20 years - the weak spending of the Bank of England is responsible issued in the form of a deposit at the leads to falling prices, which creates a for setting short-term interest rates central bank. stronger incentive for people to hold and other monetary policy in the UK, onto their cash, and also makes debts such as quantitative easing. The idea is to add more money into more difficult to repay. the system, which depresses the Nationalisation: The act of bringing value of the currency, and to push up In a liquidity trap, monetary policy an industry or assets such as land and the value of the assets being bought can become useless, and Keynes said property under state control. and to lower longer-term interest that the onus is on governments to rates, which encourages more increase their spending. Negative equity: Refers to a borrowing and investment. Some situation in which the value of your economists fear that quantitative Loans-to-deposit ratio: For financial house is less than the amount of the easing can lead to very high inflation institutions, the sum of their loans mortgage that still has to be paid off. in the long term. divided by the sum of their deposits. It is used as a way of measuring a Options: A type of derivative that Rating: The assessment given to bank's vulnerability to the loss of gives an investor the right to buy (or debts and borrowers by a ratings confidence in a liquidity crisis. to sell) something - anything from a agency according to their safety from Deposits are typically guaranteed by share to a barrel of oil - at an agreed an investment standpoint - based on the bank's government and are price and at an agreed time in the their creditworthiness, or the ability of therefore considered a safer source of future. Options become much more the company or government that is funding for the bank. valuable when markets are volatile, as borrowing to repay. they can be an insurance against price Before the 2008 financial crisis, many swings. Ratings range from AAA, the safest, banks became reliant on other down to D, a company that has sources of funding - meaning they had Platform: Platforms are online already defaulted. Ratings of BBB- or very high loan-to-deposit ratios. When services, used by intermediaries (and higher are considered "investment these other sources of funding sometimes consumers directly) to grade". Below that level, they are suddenly evaporated, the banks were view and administer their investment considered "speculative grade" or left critically short of cash. portfolios. As well as providing more colloquially as junk. facilities for investments to be bought Mark-to-market (MTM): Recording and sold, platforms are often used to Rating agency: A company the value of an asset on a daily basis aggregate, and arrange custody for responsible for issuing credit ratings. according to current market prices. So customers’ assets. The major three rating agencies are for a Greek government bond, the Moody's, Standard & Poor's and Fitch. MTM is how much it could be sold for The term platform is often used to today. describe both wraps and fund Recapitalisation: To inject fresh supermarkets. equity into a firm or a bank, which Banks are not required to mark to can be used to absorb future losses market investments that they intend Preference shares: A class of shares and reduce the risk of insolvency. to hold indefinitely (in what is called that usually do not offer voting rights, Typically this will happen via the firm the "banking book" in accounting but do offer a superior type of issuing new shares. The cash raised jargon). Instead, these investments dividend, paid ahead of dividends to can also be used to repay debts. are valued at the price at which they ordinary shareholders. Preference were originally purchased, minus any shareholders often also have In the case of a government impairment charges - which might somewhat better protection when a recapitalising a bank, it results in the arise following a default by the company is liquidated. government owning a stake in the borrower. bank. In an extreme case, such as Private equity fund: An investment Royal Bank of Scotland, it can lead to Monetary policy: The policies of the fund that specialises in buying up nationalisation, where the government central bank. A central bank has an troubled or undervalued companies, owns a majority of the bank. unlimited ability to create new money. reorganising them, and then selling This allows it to control the short-term them off at a profit. interest rate, as well as to engage in unorthodox policies such as PPI: The Producer Prices Index, a quantitative easing - printing money measure of the wholesale prices at to buy up government debts and which factories and other producers other assets. Monetary policy can be are able to sell goods in an economy. used to control inflation and to support economic growth. Recession: A period of negative Ring-fence: A recommendation of another investor and then sell it in the economic growth. In most parts of the the UK's Independent Commission on relevant market. The aim is to buy world a recession is technically Banking. Services provided by the back the asset at a lower price and defined as two consecutive quarters of banks that are deemed essential to return it to its owner, pocketing the negative growth - when economic the UK economy - such as customer difference. Also known as shorting. output falls. In the United States, a accounts, payment transfers, lending larger number of factors are taken to small and medium businesses - Spread (yield): The difference in the into account, such as job creation and should be separated out from the yield of two different bonds of manufacturing activity. However, this banks other, riskier activities. approximately the same maturity, means that a US recession can usually usually in the same currency. The only be defined when it is already They would be placed in a separate spread is used as a measure of the over. subsidiary company in the bank, and market's perception of the difference provided with its own separate capital in creditworthiness of two borrowers. Repo: A repurchase agreement - a to absorb any losses. The ring-fenced financial transaction in which someone business would also be banned from Stagflation: The dreaded sells something (for example a bond lending to or in other ways exposing combination of inflation and or a share) and at the same time itself to the risks of the rest of the stagnation - an economy that is not agrees to buy it back again at an bank - in particular its investment growing while prices continue to rise. agreed price at a later day. The seller banking activities. Most major western economies is in effect receiving a loan. Repos experienced stagflation during the were heavily used by investment Securities lending: When one broker 1970s. banks such as Lehman Brothers to or dealer lends a security (such as a borrow money prior to the financial bond or a share) to another for a fee. Sticky prices: A phenomenon crisis. This is the process that allows short observed by Depression-era selling. economist John Maynard Keynes. Repos are also used by speculators for Workers typically strongly resist short selling. The speculator can buy a Securitisation: Turning something falling wages, even if other prices - share through a repo and then into a security. For example, taking and therefore the cost of living - is immediately sell it again. At a later the debt from a number of mortgages falling. This can mean that, date the speculator hopes to buy the and combining them to make a particularly during deflation, wages share back from the market at a financial product, which can then be can become uncompetitive, leading to cheaper price, before selling it back traded (see mortgage backed higher unemployment. The implication again at the pre-agreed price via the securities). Investors who buy these is that periods of deflation usually go repo. securities receive income when the hand-in-hand with very high original home-buyers make their unemployment. Reserves: Assets accumulated by a mortgage payments. central bank, which typically comprise Many economists warn that this may gold and foreign currency. Reserves Security: A contract that can be be the fate of Greece and other are usually accumulated in order to assigned a value and traded. It could struggling economies within the help the central bank defend the value be a share, a bond or a mortgage- Eurozone. of the currency, particularly when its backed security. value is pegged to another foreign Stimulus: Monetary policy or fiscal currency or to gold. Separately, the term "security" is also policy aimed at encouraging higher used to mean something that is growth and/or inflation. This can Reserve currency: A currency that is pledged by a borrower when taking include interest rate cuts, quantitative widely held by foreign central banks out a loan. For example, mortgages in easing, tax cuts and spending around the world in their reserves. the UK are usually secured on the increases. The US dollar is the pre-eminent borrower's home. reserve currency, value is pegged to This means that if the borrower Sub-prime mortgages: These carry another foreign currency or to gold, cannot repay, the lender can seize the a higher risk to the lender (and but the euro, pound, yen and Swiss security - the home - and sell it in therefore tend to be at higher interest franc are also popular. order to help repay the outstanding rates) because they are offered to debt. people who have had financial Retained earnings: Profits not paid problems or who have low or out by a company as dividends and Shadow banking: A global financial unpredictable incomes. held back to be reinvested. system - including investment banks, securitisation, SPVs, CDOs and Swap: A derivative that involves an Rights issue: When a public monoline insurers - that provides a exchange of cash flows between two company issues new shares to raise similar borrowing-and-lending parties. For example, a bank may cash. The company might do this for a function to banks, but is not regulated swap out of a fixed long-term interest number or reasons - because it is like banks. Prior to the financial crisis, rate into a variable short-term running short of cash, because it the shadow banking system had interest rate, or a company may swap wants to make an expensive grown to play as big a role as the a flow of income out of a foreign investment or because it needs to be banks in providing loans. However, currency into their own currency. recapitalised. much of shadow banking system collapsed during the credit crunch that By putting more shares on the began in 2007, and in the 2008 market, a company dilutes the value financial crisis. of its existing shares. It is called a "rights" issue, because existing Short selling: A technique used by shareholders have the first right to investors who think the price of an buy the new shares, thereby avoiding asset, such as shares or oil contracts, dilution of their existing shares. will fall. They borrow the asset from Toxic debts: are debts that are very security or market index. It can either data and research, and comments on unlikely to be recovered from be measured by using the standard global economic policy. borrowers. Most lenders expect that deviation or variance between returns some customers cannot repay; toxic from that same security or market Wraps: Wraps and fund debt describes a whole package of index. Commonly, the higher the supermarkets are very similar. loans that are unlikely to be repaid. volatility, the riskier the security. Generally, fund supermarkets offer access to a wide variety of unit trusts During the financial crisis, toxic debts Warrants: A document entitling the and open ended investment were very hard to value or to sell, as bearer to receive shares, usually at a companies (OEICS). Wraps offer the markets for them ceased to stated price. access to a greater variety of products function. This greatly increased and usually support advisers that uncertainty about the financial health Working capital: A measure of a want to agree their own remuneration of the banks that owned much of company's ability to make payments with clients. these debts. falling due in the next 12 months. It is calculated as the difference between Write-down: Reducing the book Underwriters: The financial the company's current assets (unsold value of an asset, either to reflect a institution pledging to purchase a inventories plus any cash expected to fall in its market value (see mark-to- certain number of newly-issued be received over the coming year) market) or due to an impairment securities if they are not all bought by minus its current liabilities (what the charge. investors. The underwriter is typically company owes over the same period). an investment bank who arranges the A healthy company should have a Yield: The return to an investor from new issue. The need for an positive working capital. buying a bond implied by the bond's underwriter can arise when a current market price. Also indicates company makes a rights issue or a A company with negative working the current cost of borrowing in the bond issue. capital can experience cash flow market for the bond issuer. As a problems. bond's market price falls, its yield Unwind: To unwind a deal is to goes up, and vice versa. Yields can reverse it -to sell something that you World Bank: Set up after World War increase for a number of reasons. have previously bought, or vice versa, II along with the IMF, the World Bank Yields for all bonds in a particular or to cancel a derivative contract for is mainly involved in financing currency will rise if markets think that an agreed payment. When development projects aimed at the central bank in that currency will administrators are called in to a bank, reducing world poverty. The World raise short-term interest rates due to they must do the unwinding before Bank is traditionally headed by an stronger growth or higher inflation. creditors can get any money back. American, while the IMF is headed by Yields for a particular borrower's a European. Like the IMF and OECD, bonds will rise if markets think there Volatility: A statistical measure of the World Bank produces economic is a greater risk that the borrower will the dispersion of returns for a given default.