Glossary
Coupon rate The rate of interest, based on the nom-
inal or par value, that an organisation is contracted to
pay on its loan notes. (p. 234)
Covariance A statistical measure of the extent to
which a change in the value of one variable is linked
to that of another variable. (p. 198)
Covenants (on loans) Restrictions imposed by
lenders, as part of the lending contract, on the free-
dom of action of borrowers: for example, restricting
the total amount of dividend that may be paid each
year. (p. 238)
Creative accounting Adopting accounting policies
to achieve a particular view of performance and
position that preparers of financial statements would
like users of those statements to see rather than what
is a true and fair view. (p. 50)
Cum dividend During the period (that is, most of the
time) that a share is quoted as cum dividend, a buyer
of the share will be entitled to receive all of any
future dividends, for as long as that buyer holds the
share. (p. 278)
Currency futures Forward contracts, made in stand-
ardised amounts for delivery on standardised dates,
so that they may be bought and sold. (p. 422)
Currency options A right but not an obligation to
buy or sell a stated quantity of foreign currency at
a stated exchange rate, on a stated date. (p. 421)
Currency swaps An arrangement where two busi-
nesses, each with an obligation in a foreign currency,
but in the opposite foreign currency, each agree to
take on the other business’s obligation. (p. 424)
Debenture A type of long-term borrowing. (p. 234)
Derivatives Assets or obligations whose value is de-
pendent on some asset from which they are derived;
for example, an option. (p. 15)
Diversification Investing in more than one asset, real
or financial, such that the assets’ returns are not per-
fectly positively correlated, leading to risk reduction.
(p. 164)
Divestment Selling off some asset or group of assets;
the opposite of investment. (p. 401)
Economic risk (exchange rate) The risk to any
business that arises from the fact that transactions
are carried out, by that business and/or by others, in
foreign currencies. (p. 422)
Economic value added A measure of economic, as
opposed to accounting, profit. It is said to be more
useful than accounting profit as a measure of busi-
ness performance because it overcomes some weak-
nesses of accounting in this context. (p. 137)
Efficiency (portfolio) A portfolio is said to be effici-
ent when all of the specific risk has been diversified
away. (p. 195)Efficiency (pricing) A state of affairs that exists when
security prices fully, rationally and at all times reflect
all that is known about businesses and their environ-
ment. (p. 184)
Efficient frontier A curve on a graph of return against
risk that shows the return/risk profiles of all of the
various efficient portfolios that it is theoretically
possible to create. (p. 195)
Equities SeeOrdinary shares. (p. 12)
Eurobonds Unsecured loan notes denominated in
a currency other than the home currency of the
borrowing business. (p. 239)
Ex dividend During the period (usually only a small
part of the time) that a share is quoted as ex divi-
dend, a buyer of the share will not be entitled to
receive the immediately forthcoming dividend from
that share. (p. 278)
Exchange rate risk The risk that foreign exchange
rates between currencies will shift to the disadvant-
age of a particular business. (p. 418)
Expected value A weighted average of the possible
values of outcomes, where the probabilities of each
of the outcomes are used as weights. (p. 162)
Finance lease An arrangement where a financial
institution buys an asset needed by a potential user
and then leases that asset to the user for the whole of
the asset’s effective life. (p. 242)
Financial assets Shares, loan notes and the like, as
opposed to real productive assets. (p. 4)
Financial gearing The existence of loans and pre-
ference shares in the long-term financing of a
business. Also known as capital gearing. (p. 14)
Financial risk That part of the total risk to share-
holders’ returns that arises from the method of
financing the business. The more highly capital
(financially) geared, the higher the level of financial
risk. (p. 297)
Fisher effect A theoretical explanation of relative
foreign currency exchange rates. It maintains that the
exchange rate between two currencies will adjust in
the light of different rates of interest on deposits,
between the two currency areas, to ensure that there
is the same equivalent rate of interest. (p. 415)
Fixed interest rate An interest rate that stays fixed
throughout the period of a contract. (p. 239)
Floating interest rate An interest rate that varies,
usually with the general level of interest rates in the
economy, during the period of a contract. (p. 239)
Forward (foreign exchange) contract A contract to
exchange two currencies where the contract (includ-
ing the exchange rate being stated) takes immediate
effect, but where the currencies are to be delivered at
a later date. (p. 420)BUSF_Z04.qxd 11/19/08 10:34 Page 501