GlossaryG–10
high-yield bonds Bonds rated below
investment grade (also known as junk
bonds or speculative bonds).
horizontal merger A combination of
competitors within the same industry.
hostile takeover The acquisition of one
company (the target) by another (the
acquirer) through an open market bid
for a majority of the target company’s
shares if the target company’s senior
managers do not support (or, more
likely, actively resist) the acquisition.
hubris hypothesis of corporate
takeovers A theory that contends
that some managers overestimate
their own managerial capabilities and
pursue takeovers with the belief that
they can better manage their takeover
target than the target’s current
management.
hurdle rate The minimum rate of
return that must be achieved.I
income bonds A type of life insurance
policy only friendly societies issue.
They are like a savings investment
account, and distribute regular
bonuses to the lenders.
incremental cash flows Cash flows
triggered by an investment that would
not have otherwise occurred.
indenture A legal contract between
a borrower (issuer) and an investor,
stating the conditions under which a
bond has been issued.
indirect insolvency costs Include
the loss of customers and key
suppliers, the time that managers
spend managing the insolvency
process rather than focusing on their
business, the loss of key employees,
and missed opportunities to invest in
positive-NPV projects.
indirect quote An exchange rate quoted
in terms of foreign currency per unit
of domestic currency.
index fund A passively managed fund
that tries to mimic the performance ofa market index, such as the ASX 200.
initial margin The minimum dollar
amount required of an investor
when taking a position in a futures
contract.
initial public offering (IPO) Companies
offer shares for sale to the public
for the first time by selling shares to
outside investors and listing them for
trade on a stock exchange.
IPO initial return The gain (or loss)
when an allocation of shares from an
investment banker is sold at the first
opportunity.
IPO underpricing Occurs when
the offer price in the prospectus is
consistently lower than what the
market is willing to bear.
insolvency Occurs only when a
company enters the condition
formally and effectively surrenders
control of the company to an external
administrator. It is a legal process
rather than a financial condition.
insolvency costs The direct and indirect
costs of the insolvency process.
insolvent The situation in which a
company’s liabilities exceed its assets
and is unable to pay its debts when
they are due.
institutional venture capital
funds Formal business entities with
full-time professionals dedicated to
seeking out and funding promising
ventures.
integrated accounts payable Provides
a company with outsourcing of its
accounts payable or disbursement
operations. Also known as
comprehensive accounts payable.
interest differential The difference
between the fixed and floating
interest rates that is exchanged in an
interest rate.
interest rate cap A call option on
interest rates.
interest rate collar A strategy involving
the purchase of an interest rate cap andthe simultaneous sale of an interest rate
floor, using the proceeds from selling
the floor to purchase the cap.
interest rate floor A put option on
interest rates.
interest rate parity An equilibrium
relationship that predicts that
differences in risk-free interest rates
in two countries must be tied to
differences in currency values on the
spot and forward markets.
interest rate risk The risk resulting
from changes in market interest rates
that cause fluctuations in a bond’s
price. Also, the risk of suffering losses
as a result of unanticipated changes in
market interest rates.
interest rate swap A swap contract in
which two parties exchange payment
obligations involving different interest
payment schedules.
internal financing Relying on internally
generated cash flow (principally
retained profits) as the dominant
source of new financing.
internal rate of return (IRR) The
compound annual rate of return on a
project, given its up-front costs and
subsequent cash flows.
international ordinary equity Equity
issues sold in more than one country
by nonresident corporations.
in the money A call (put) option is in
the money when the share price is
greater (less) than the strike price.
intrinsic value The profit that an
investor makes from exercising an
option, ignoring transactions costs and
the option premium.
inventory turnover A measure of how
quickly a company sells its goods.
investee companies Companies in
which the fund invests. These are also
called portfolio companies.
investment banks Financial
institutions that assist companies
in raising long-term debt and equity
financing in the world’s capital