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Glossary of Terms 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. BFS Handforth LTD T/as Burton Financial Services, Abbott & Booth is authorised and regulated by the Financial Conduct Authority. Registered in England Company No. 4949589; FCA Registration number [email protected] V3 Apr 18 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.
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