Introduction to Corporate Finance

Glossary

G–11

markets, advise corporations about

major financial transactions and

are active in the business of selling

and trading securities in secondary

markets.

investment flows Cash flows
associated with the purchase or sale
of fixed assets.

investment-grade bonds Bonds rated

Baa or higher by Moody’s (BBB– or

higher by S&P).

J

joint and several liability A legal
concept that makes each partner in
a partnership legally liable for all the
debts of the partnership.

junk bonds Bonds rated below

investment grade (also known as high-

yield bonds or speculative bonds).

just-in-time (JIT) system An inventory
management technique used to make
sure that materials arrive exactly when
they are needed for production, rather
than being stored onsite.

K

Kangaroo bonds Bonds sold by foreign

corporations to Australian investors,

issued in the Australian market,

denominated in Australian dollars

and subject to Australian laws and

regulations.

L

lead underwriter The investment bank
that takes the primary role in assisting
a company in a public offering of
securities.

lease-versus-purchase (or lease-versus-
buy) decision The alternatives
available are to: (1) lease the assets;
(2) borrow funds to purchase the
assets; or (3) purchase the assets
using available liquid resources.
Even if the company has the liquid
resources with which to purchase
the assets, the use of these funds is
viewed as equivalent to borrowing.

leasing Acquiring use of an asset by

agreeing to make a series of periodic,

tax-deductible payments.

lessee Under a lease, the user of the

underlying asset who makes regular

payments to the lessor.

lessor Under a lease, the owner of the

asset who receives regular payments

for its use from the lessee.

leveraged lease A lease under

which the lessor acts as an equity

participant, supplying part of the

cost of the asset, and borrowing the

balance of the funds.

leveraged recapitalisation When a

company greatly increases the portion

of debt in its capital structure, often

retiring equity in the process.

LIBOR The London Interbank

Offered Rate. The rate that the most

creditworthy international banks

that deal in Eurodollars charge on

interbank loans.

lien A legal contract specifying under

what conditions a lender can take title

to an asset if a loan is not repaid and

prohibiting the borrowing company

from selling or disposing of the asset

without the lender’s consent.

limited liability company (LLC) A

form of business organisation that

combines the tax advantages of a

partnership with the limited liability

protection of a company.

limited partner An investor in the fund

who makes capital commitments,

which the general partner then draws

on over time as the fund becomes

fully invested.

limited partnership (LP) A partnership

in which most of the participants

(the limited partners) have the limited

liability of corporate shareholders,

but their share of the profits from

the business is taxed as partnership

income.

line of credit or bank overdraft An up-

front commitment by a bank to lend

to a borrower in the future.

liquidation The orderly winding up

of a company’s affairs involving the

realisation of the company’s assets,

cessation or sale of its operations,

distributing the proceeds of realisation

among its creditors and distributing

any surplus among its shareholders.

liquidation value The value that

remains after a company’s assets are

sold and its liabilities are paid.

liquidity management Activities

aimed at both earning a positive

return on idle excess cash balances

and obtaining low-cost financing

for meeting unexpected needs and

seasonal cash shortages.

liquidity preference theory States

that the slope of the yield curve is

influenced not only by expected

interest rate changes, but also

by the liquidity premium that

investors require on long-term

bonds.

liquidity ratios Measure a company’s

ability to satisfy its short-term

obligations as they come due.

loan amortisation Occurs when a

borrower pays back the principal over

the life of the loan, often in equal

periodic payments.

loan amortisation schedule Used to

determine loan amortisation payments

and the allocation of each payment to

interest and principal.

loan covenants Contractual clauses

that limit the actions that a borrower

can take, protecting the lender’s

wealth from being expropriated.

loans Private debt agreements

arranged between corporate borrowers

and financial institutions, especially

commercial banks.

lockbox system A technique for

speeding up collections that affects all

three components of float. Customers

mail payments to a post office box,

which is emptied regularly by the