GlossaryG–9fixed-for-floating interest rate
swap Typically one party will
make fixed-rate payments to another
party in exchange for floating-rate
payments.
fixed-price offer An offer in which the
underwriters set the final offer price
for a new issue weeks in advance.fixed-rate offerings Debt issues that
have a coupon interest rate that
remains constant throughout the
issue’s life.flip To buy shares at the offer price
and sell them on the first trading day.float Funds that have been sent by the
payer but are not yet usable funds to
the payee.
floating exchange rate An exchange
rate system in which a currency’s
value is allowed to fluctuate in
response to market forces.floating-rate bonds Bonds that make
coupon payments that vary through
time. The coupon payments are
usually tied to a benchmark market
interest rate. Also called variable-rate
bonds.floating-rate issues Debt issues with
an interest (coupon) rate that is a
fixed spread above a base rate that
periodically changes.foreign bond A bond issued in a host
country’s financial market, in the host
country’s currency, by a non-resident
borrower.forward discount When one currency
buys less of another on the forward
market than it buys on the spot
market.
forward exchange rate The exchange
rate quoted for a transaction that will
occur on a future date.
forward premium When one
currency buys more of another on
the forward market than it buys on
the spot market.forward price The price to which
parties in a forward contract agree.
The price dictates what the buyer will
pay to the seller on a future date.
forward rate The forward price in a
currency forward contract.
forward rate agreement (FRA) A
forward contract in which the
underlying asset is not an asset at all
but an interest rate.
forward-spot parity An equilibrium
relationship that predicts that the
current forward rate will be an
unbiased predictor of the spot rate on
a future date.
free cash flow (FCF) The net amount
of cash flow remaining after the
company has met all operating needs,
including capital expenditure and
working capital needs. Represents the
cash amount that a company could
distribute to investors after meeting
all its other obligations.
full disclosure Requires issuers
to reveal all relevant information
concerning the company selling
the securities and the securities
themselves to potential investors.
fundamental principle of financial
leverage Substituting debt for
equity increases expected returns to
shareholders but also increases the
risk that equity investors bear.
fungibility The ability to close out
a position by taking an offsetting
position.
future value The value of an
investment made today measured at
a specific future date accounting for
interest earned over the life of the
investment.
futures contract Involves two parties
agreeing today on a price at which the
purchaser will buy a given amount of
a commodity or financial instrument
from the seller at a fixed date some
time in the future.G
general cash offerings Share offerings
sold to all investors, not just existing
shareholders.
general partners The fund
management company responsible
for seeking out and managing
investment opportunities; negotiating
investment terms, monitoring
performance, arranging investment
exit strategies and managing
distributions of returns to the limited
partners. The general partners have
unlimited liability over the life of the
fund.
Glass-Steagall Act US Congressional
act of 1933 mandating the separation
of investment and commercial
banking (act repealed 1999).
goodwill An intangible asset created if
the restated values of the target in a
merger lead to a situation in which its
assets are less than its liabilities and
equity.
Gordon growth model Values a share
under the assumption that dividends
grow at a constant rate forever.
gross profit margin A measure of
profitability that represents the
percentage of each sales dollar
remaining after a company has paid
for its goods.
growing perpetuity A cash flow
stream that grows each period at a
constant rate and continues forever.H
hedge To diversify risks by using
financial instruments to offset
market risks such as interest rate and
currency fluctuations.
hedge ratio A combination of shares
and options that results in a risk-free
payoff.
hedging Trading an asset for the sole
purpose of reducing or eliminating the
risk associated with some other asset.