Capital Market Concepts

Let's understand the Concept...
What Does Secondary Market Mean?
A market where investors purchase securities or assets from other

investors, rather than from issuing companies themselves. The
national exchanges - such as the New York Stock Exchange and the
NASDAQ are secondary markets.
Secondary markets exist for other securities as well, such as when

funds, investment banks, or entities such as Fannie Mae
purchase mortgages from issuing lenders. In any secondary market
trade, the cash proceeds go to an investor rather than to the
underlying company/entity directly.
A newly issued IPO will be considered a Primary market trade when
the shares are first purchased by investors directly from the
underwriting investment bank; after that any shares traded will be on
the secondary market, between investors themselves. In the primary
market prices are often set beforehand, whereas in the secondary
market only basic forces like supply and demand determine the price
of the security.
What Does Debt Mean?

An amount of money borrowed by one party from another.
Many corporations/individuals use debt as a method for making large
purchases that they could not afford under normal circumstances. A
debt arrangement gives the borrowing party permission to borrow
money under the condition that it is to be paid back at a later date,
usually with interest.
Bonds, loans and commercial paper are all examples of debt. For
example, a company may look to borrow $1 million so they can buy a
certain piece of equipment. In this case, the debt of $1 million will
need to be paid back (with interest owing) to the creditor at a later
date.
What Does Debt Security Mean?

Any debt instrument that can be bought or sold between two parties
and has basic terms defined, such as notional amount (amount
borrowed), interest rate and maturity/renewal date. Debt securities
include government bonds, corporate bonds, CDs, municipal bonds,
preferred stock, collateralized securities and zero-coupon securities.
The interest rate on a debt security is largely determined by the

perceived repayment ability of the borrower; higher risks of payment
default almost always lead to higher interest rates to borrow capital.
Also known as "fixed-income securities."
Debt securities on the whole are safer investments than equity

securities, but riskier than cash. Debt securities get their measure of
safety by having a principal amount that is returned to the lender at
the maturity date or upon the sale of the security. They are typically
classified and grouped by their level of default risk, the type of
issuer and income payment cycles.
What Does Money Market Mean?

A segment of the financial market in which financial instruments with
high liquidity and very short maturities are traded. The money
market is used by participants as a means for borrowing and lending in
the short term, from several days to just under a year. Money market
securities consist of negotiable certificates of deposit (CDs), bankers
acceptances, U.S. Treasury bills, commercial paper, municipal notes,
federal funds and repurchase agreements (repos).
The money market is used by a wide array of participants, from a

company raising money by selling commercial paper into the market to
an investor purchasing CDs as a safe place to park money in the short
term. The money market is typically seen as a safe place to put money
due the highly liquid nature of the securities and short maturities, but
there are risks in the market that any investor needs to be aware of
including the risk of default on securities such as commercial paper.
What Does Money Market Fund Mean?

An investment fund that holds the objective to earn interest for
shareholders while maintaining a net asset value (NAV) of $1 per
share. Mutual funds, brokerage firms and banks offer these funds.
Portfolios are comprised of short-term (less than one year) securities
representing high-quality, liquid debt and monetary instruments.
A money market fund's purpose is to provide investors with a
safe place to invest easily accessible cash-equivalent assets
characterized as a low-risk, low-return investment. Because of their
relatively low returns, investors, such as those participating
in employer-sponsored retirement plans, might not want to use money
market funds as a long-term investment option.

What Does Dividend Mean?
A distribution of a portion of a company's earnings, decided by the board of
directors, to a class of its shareholders. The dividend is most often quoted in
terms of the dollar amount each hare receives (dividends per share). It can also
be quoted in terms of a percent of the current market price, referred to as
dividend yield.
Also referred to as "Dividend Per Share (DPS)."
Mandatory distributions of income and realized capital gains made to

mutual fund investors.
Mutual funds pay out interest and dividend income received from their portfolio
holdings as dividends to fund shareholders. In addition, realized capital gains
from the portfolio's trading activities are generally paid out (capital gains
distribution) as a yearend dividend.
What Does Dividend Yield Mean?

A financial ratio that shows how much a company pays out in dividends each
year relative to its share price. In the absence of any capital gains, the dividend
yield is the return on investment for a stock. Dividend yield is calculated as
follows:
To better explain the concept, refer to this dividend yield example: If two

companies both pay annual dividends of $1 per share, but ABC company's stock
is trading at $20 while XYZcompany's stock is trading at $40, then ABC has a
dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other
factors are equivalent, an investor looking to supplement his or her income
would likely prefer ABC's stock over that of XYZ.
What Does Interest Mean?

-The charge for the privilege of borrowing money, typically expressed
as an annual percentage rate.
Interest is commonly calculated using one of two methods: simple
interest calculation, or compound interest calculation.
What Does Accrued Interest Mean?

1. A term used to describe an accrual accounting method when
interest that is either payable or receivable has been recognized, but
not yet paid or received. Accrued interest occurs as a result of the
difference in timing of cash flows and the measurement of these cash
flows.
2. The interest that has accumulated on a bond since the last interest
payment up to, but not including, the settlement date.
For example, accrued interest receivable occurs when interest on an

outstanding receivable has been earned by the company, but has not
yet been received. A loan to a customer for goods sold would result in
interest being charged on the loan. If the loan is extended on October
1 and the lending company's year ends on December 31, there will be
two months of accrued interest receivable recorded as interest
revenue in the company's financial statements for the year.
Accrued interest is added to the contract price of a bond transaction.
Accrued interest is that which has been earned since the last coupon
payment. Because the bond hasn't expired or the next payment is not
yet due, the owner of the bond hasn't officially received the money. If
he or she sells the bond, accrued interest is added to the sale price.
*WhatDoesCorporateActionMean?
Any event that brings material change to a company and affects
its stakeholders. This includes shareholders, both common and
preferred, as well as bondholders. These events are generally
approved by the company's board of directors; shareholders are
permitted to vote on some events as well.
Splits, dividends, mergers, acquisitions and spin-offs are all examples
of corporate actions. For example, a company may decide to split its
shares 2:1, leaving shareholders with twice as many shares as
they had before. Bondholders are also subject to the effects of
corporate actions, which might include calls or the issuance of new
debt. For example, if interest rates fall sharply, a company may call in
bonds and pay off existing bondholders, then issue new debt at the
current lower interest rates.
In short, A Corporate Action is any pending or completed action taken

by an issuing corporation that affects the financial and/or physical
status of a security.
Financial Status : An action affecting the financial status of a security
is one that influences the original cost, market value, or the income
earned on a security.
Example : A corporation declares a cash dividend to be paid to its
stockholders. The financial effect on the security would be income
earned.
Physical status change : An action affecting the physical status of a

security is one that changes the appearance of the actual certificate.
Example-The corporation changes its name. All registered
shareholders will be notified of the details related to the change. In the
physical environment, the corporation's new name replaces the old
name on the certificate and the corporation reissues the certificate to
the shareholders. In the book entry environment, a physical certificate
may not exist so the certificate records are updated electronically.
* What Does Letter of Intent - LOI Mean?
- An agreement that describes in detail a corporation's intention to
execute a corporate action. The letter of intent is created by the
corporation with its management and legal council, among others,
and outlines the details of the action.
- Letters of intent are used during the merger and acquisitions process
to outlines a firm's plan to buy/take over another company. For
example, the letter of intent will disclose the specific terms of the
transaction (whether it is a cash or stock deal).
Corporate Action - Important Dates!

The following provides a brief description of the important dates
associated with Corporate Actions. It is important to note that not all
dates are relative to all Corporate Actions.
Declaration Date : This is the date the corporation's board of

directors declares the action.
Ex-Dividend Date : This is a date set by the market and the company
to determine shareholder entitlement. A shareholder is entitled to
receive payment, or the privilege of participating in a corporate action,
if they hold the security or have purchased the security before Ex-
Date.
The Entitlement Rule is as follows:
If a shareholder owns a security on the morning of ex-dividend date
before trading begins, the shareholder is entitled to receive the
dividend payment or participate in the corporate action. If a
shareholder purchases the security on or after the Ex-Date of a
corporate action, the shareholder is not eligible to participate. If a
shareholder sells part, or all of their holding, on or after Ex-Date, the
shareholder is still entitled to participate in the corporate action.
Record Date : A corporation's board of directors establishes this date

with agreement from the market. It is the date that the transfer agent
(U.S.) or company registrar (U.K.) "closes its books" on an issue,
effectively taking a snapshot of the register. This enables the transfer
agent/registrar to have a fixed record on which to calculate the
registered holders' entitlement and to identify to whom any documents
are to be sent.
Those names listed on record date will receive the corporate action
payment or the participating documentation for the action. It is
important that the name of each current shareholder is officially
registered on the books of the transfer agent (U.S.) or registrar (U.K)
prior to "the books close" in order to receive their entitlement directly
from the issuer.
For those shareholders who have purchased a security before ex-date
but traded positions have not been settled or registered on the books
by record date, they will have to claim their right to participate in the
corporate action from the seller of the stock.
Effective Date : This is the date that a Corporate Action is effective.

On this date, the action should be accounted for on the shareholders
books. Typically, there will be a period of time that elapses between
the announcement of the action and the effective date.
Payable Date : This is the date that the shareholders receive their
entitlement, whether cash or stock. A corporation's board of directors
establishes this date.
Call Date : Often referred to as the Redemption Date in the UK, this is
the date that a callable issue may be redeemed prior to maturity.
Shareholders will have to relinquish the bond to the issuer in exchange
for payment.
What Does Mortgage-Backed Security (MBS) Mean?

A type of asset-backed security that is secured by a mortgage or
collection of mortgages. These securities must also be grouped in one
of the top two ratings as determined by a accredited credit rating
agency, and usually pay periodic payments that are similar to coupon
payments. Furthermore, the mortgage must have originated from a
regulated and authorized financial institution.Also known as a
"mortgage-related security" or a "Mortgage pass through".
When you invest in a mortgage-backed security you are essentially
lending money to a home buyer or business. An MBS is a way for a
smaller regional bank to lend mortgages to its customers without
having to worry about whether the customers have the assets to cover
the loan. Instead, the bank acts as a middleman between the home
buyer and the investment markets.
This type of security is also commonly used to redirect the interest and
principal payments from the pool of mortgages to shareholders. These
payments can be further broken down into different classes of
securities, depending on the riskiness of different mortgages as they
are classified under the MBS.
What Does Commercial Mortgage-Backed Securities (CMBS)

Mean?
A type of mortgage-backed security that is secured by the loan on a
commercial property. A CMBS can provide liquidity to real estate
investors and to commercial lenders. As with other types of MBS, the
increased use of CMBS can be attributable to the rapid rise in real
estate prices over the years.
Because they are not standardized, there are a lot of details associated
CMBS that make them difficult to value. However, when compared to a
residential mortgage-backed security (RMBS), a CMBS provides a lower
degree of prepayment risk because commercial mortgages are most
often set for a fixed term.
What Does Residential Mortgage-Backed Security (RMBS)

Mean?
A type of security whose cash flows come from residential debt such as
mortgages, home-equity loans and sub prime mortgages. This is a type
of mortgage-backed securities that focuses on residential instead of
commercial debt.
Holders of an RMBS receive interest and principal payments that come
from the holders of the residential debt. The RMBS comprises a large
amount of pooled residential mortgages.
What Does Paydown Mean?

A payment made towards an outstanding loan balance . Every time
you make a mortgage payment you are "paying down" your loan.
What Does Original Face Mean?

The par value of a mortgage-backed security at the time it is
issued. Unlike most other types of bonds, mortgage-backed securities
return both principal and interest to the holder in periodic payments
(usually monthly). Over time, the outstanding principal balance of a
mortgage-backed security will be reduced. The original face remains
an important and distinguishing piece of information associated with a
mortgage-backed security. By definition, a new issue mortgage-backed
security will have a pool factor of 1; in other words, the original face
will equal the current face. As the principal is paid down, the current
face will be less than the original face.
The current face is derived by multiplying the original face by the
current pool factor.
What Does Current Face Mean?

The current par value of a mortgage-backed security (MBS). Current
face is determined by multiplying the current pool factor by the
mortgage-backed security's original face value. A mortgage-backed
security's current face represents the outstanding principal balance (or
its outstanding face value) of the mortgage's underlying the security.
If the MBS pays interest and principal on payment dates, the current
face will decline after each payment is made
Different mortgage-Backed securities with the same issue date, same
coupon and same original face value can have greatly different current
faces. Mortgage-backed securities pay down at different rates based
on the characteristics of the underlying loans and on the actual
prepayment speed of underlying mortgages.
For example, suppose that two mortgage-backed securities (MBS 1 and

MBS 2) have the same original face value, but MBS 1 experiences
faster prepayments then MBS 2. In this case, MBS 1 will have a lower
current face value then MBS 2 as time progresses.
What Does Index Mean?

A statistical measure of change in an economy or a securities market.
In the case of financial markets, an index is an imaginary portfolio of
securities representing a particular market or a portion of it. Each
index has its own calculation methodology and is usually expressed in
terms of a change from a base value. Thus, the percentage change is
more important than the actual numeric value.
Stock and bond market indexes are used to construct index mutual
funds and exchange-traded funds (ETFs) whose portfolios mirror the
components of the index.
The Standard & Poor's 500 is one of the world's best known indexes,
and is the most commonly used benchmark for the stock market.
Other prominent indexes include the DJ Wilshire 5000 (total stock
market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far
East) and the Lehman Brothers Aggregate Bond Index (total bond
market).
Because, technically, you can't actually invest in an index, index
mutual funds and exchange-traded funds (based on indexes)
allow investors to invest in securities representing broad market
segments and/or the total market.
In Market capitalization weighted index method, index is calculated

with the help of following formula.
Current market capitalization
INDEX = ---------------------------------------------- * Base value
Base market capitalization
A market index is very important for its use.

1. as a barometer for market behavior.
2. as a benchmark portfolio performance.
3. as an underlying in derivatives instruments like index futures, and
4. in passive fund management by index funds.

What Does Fannie Mae Federal National Mortgage Association FNMA
Mean?
A governmentsponsored enterprise (GSE) that was created in 1938 to expand
the flow of mortgage money by creating a secondary mortgage market. Fannie
Mae is a publicly traded company which operates under a congressional charter that directs
Fannie Mae to channel its efforts into increasing the availability and affordability of
homeownership for low, moderate, and middleincome Americans.
Fannie Mae purchases and guarantees mortgages that meet its funding criteria. Through this
process it secures mortgages to form mortgagebacked securities (MBS). The market for Fannie
Mae's MBS is extremely large and liquid. Pension funds, insurance companies and foreign
governments are among the investors in Fannie Mae's MBS. In order to promote homeownership,
Fannie Mae also holds a large portfolio of its own and other institution's MBSs, known as its
retained portfolio. To fund this portfolio, Fannie Mae issues debt known in the market place as
agency debt.
What Does Ginnie Mae Government National Mortgage Association
GNMA Mean?
U.S. government corporation within the U.S. Department of Housing and Urban
Development (HUD). Ginnie May aims to:
Ensure liquidity for governmentinsured mortgages, including those insured by
the Federal Housing Administration (FHA), the Veterans Administration (VA)
and the Rural Housing Administration (RHA).
Bring Investors' capital into the market for these types of loans, so that the
issuers have the means to issue more.
Most of the mortgages securitized as Ginnie Mae mortgagebacked securities
(MBSs) are those guaranteed by FHA, which are typically mortgages for first
time home buyers and lowincome borrowers.
Ginnie Mae neither issues, sells or buys passthrough mortgagebacked
securities, nor does it purchase mortgage loans. It simply guarantees (insures)
the timely payment of principal and interest from approved issuers (such as
mortgage bankers, savings and loans, and commercial banks) of qualifying loans,
such as those issued by the FHA and RHA.
Unlike its cousins Freddie Mac, Fannie Mae and Sallie Mae, Ginnie Mae is not a
publiclytraded company. An investors in a GNMA security will not know who
the underlying issuer of the mortgages is, but merely that the security is
guaranteed by GNMA, which is backed by the full faith and credit of the U.S
government, just like U.S. Treasuries.
What Does 'Derivative' Mean?
A security whose price is dependent upon or derived from one or more
underlying assets. The derivative itself is merely a contract between
two or more parties.
Its value is determined by fluctuations in the underlying asset. The
most common underlying assets include stocks, bonds, commodities,
currencies, interest rates and market indexes. Most derivatives are
characterized by high leverage.
Futures contracts, forward contracts, options and swaps are the most
common types of derivatives.
Derivatives are generally used to hedge risk, but can also be used for
speculative purposes.
For example, a European investor purchasing shares of an American
company off of an American exchange (using U.S. dollars to do so)
would be exposed to exchange-rate risk while holding that stock. To
hedge this risk, the investor could purchase currency futures to lock in
a specified exchange rate for the future stock sale and currency
conversion back into Euros.
What Does Forward Contract Mean?
A cash market transaction in which delivery of the commodity is
deferred until after the contract has been made. Although the delivery
is made in the future, the price is determined on the initial trade date.
Most forward contracts don't have standards and aren't traded on
exchanges. A farmer would use a forward contract to "lock-in" a price
for his grain for the upcoming fall harvest.
What Does Currency Forward Mean?
A forward contract in the forex market that locks in the price at which
an entity can buy or sell a currency on a future date. Also known as
"outright forward currency transaction", "forward outright" or "FX
forward".
In currency forward contracts, the contract holders are obligated to
buy or sell the currency at a specified price, at a specified quantity and
on a specified future date. These contracts cannot be transferred.
What Does Futures Mean?

A financial contract obligating the buyer to purchase an asset (or the
seller to sell an asset), such as a physical commodity or a financial
instrument, at a predetermined future date and price. Futures
contracts detail the quality and quantity of the underlying asset; they
are standardized to facilitate trading on a futures exchange. Some
futures contracts may call for physical delivery of the asset, while
others are settled in cash. The futures markets are characterized by
the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price
movement of the underlying asset. For example, a producer of corn
could use futures to lock in a certain price and reduce risk (hedge). On
the other hand, anybody could speculate on the price movement of
corn by going long or short using futures.
The primary difference between options and futures is that options
give the holder the right to buy or sell the underlying asset at
expiration, while the holder of a futures contract is obligated to fulfill
the terms of his/her contract.
What Does Futures Contract Mean?
A contractual agreement, generally made on the trading floor of a
futures exchange, to buy or sell a particular commodity or financial
instrument at a pre-determined price in the future. Futures contracts
detail the quality and quantity of the underlying asset; they are
standardized to facilitate trading on a futures exchange. Some futures
contracts may call for physical delivery of the asset, while others are
settled in cash.
What Does Mark To Market - MTM Mean?
1. A measure of the fair value of accounts that can change over time,
such as assets and liabilities. Mark to market aims to provide a realistic
appraisal of an institution's or company's current financial situation.
2. The accounting act of recording the price or value of a security,
portfolio or account to reflect its current market value rather than its
book value.
3. When the net asset value (NAV) of a mutual fund is valued based on
the most current market valuation.
4.This is done most often in futures accounts to make sure that margin
requirements are being met. If the current market value causes the
margin account to fall below its required level, the trader will be faced
with a margin call.
5. Mutual funds are marked to market on a daily basis at the market
close so that investors have an idea of the fund's NAV.
MTM settlement:
All futures contracts for each member are marked -to -market (MTM) to
the daily settlement price of the relevant futures contract at the end of
the day. The profits / losses are computed as the difference between:
1.The trade price and the day's settlement price for contracts executed
during the day but not squared up.
2. The previous day's settlement price and the current day's
settlement price for brought forward contracts.
3. The buy price and the sell price for contracts executed during the
day and squared up.
What Does Maintenance Margin Mean?
The minimum amount of equity that must be maintained in a margin
account. In the context of the NYSE and NASD, after an investor has
bought securities on margin, the minimum required level of margin is
25% of the total market value of the securities in the margin account.
Keep in mind that this level is a minimum, and many brokerages have
higher maintenance requirements of 30-40%.
Also referred to as "minimum maintenance" or "maintenance
requirement".
As governed by the Federal Reserve's Regulation T, when a trader
buys on margin, key levels must be maintained throughout the life of
the trade. First off, a broker cannot extend any credit to accounts with
less than $2,000 in cash (or securities). Second, the initial margin of
50% is required for a trade to be entered. Finally, the maintenance
margin says that an equity level of at least 25% must be maintained.
The investor will be hit with a margin call if the value of securities falls
below the maintenance margin.
What Does Option Mean?
A financial derivative that represents a contract sold by one party
(option writer) to another party (option holder). The contract offers the
buyer the right, but not the obligation, to buy (call) or sell (put) a
security or other financial asset at an agreed-upon price (the strike
price) during a certain period of time or on a specific date (exercise
date).
Options are extremely versatile securities that can be used in many
different ways. Traders use options to speculate, which is a relatively
risky practice, while hedgers use options to reduce the risk of holding
an asset.
In terms of speculation, option buyers and writers have conflicting

views regarding the outlook on the performance of an underlying
security.
For example, because the option writer will need to provide the
underlying shares in the event that the stock's market price will
exceed the strike, an option writer that sells a call option believes that
the underlying stock's price will drop relative to the option's strike
price during the life of the option, as that is how he or she will reap
maximum profit.
This is exactly the opposite outlook of the option buyer. The buyer
believes that the underlying stock will rise, because if this happens, the
buyer will be able to acquire the stock for a lower price and then sell it
for a profit.
American Option : American options are options that can be
exercised at any time up to the expiration date. Most exchange-traded
options are American.
European options: European options are options that can be
exercised only on the expiration date itself. European options are
easier to analyze than American options.
What Does Call Option Mean?
An agreement that gives an investor the right (but not the obligation)
to buy a stock, bond, commodity, or other instrument at a specified
price within a specific time period.
It may help you to remember that a Call option gives you the right to
"call in" (buy) an asset. You profit on a call when the underlying asset
increases in price.
What Does Put Option Mean?
An option contract giving the owner the right, but not the obligation, to
sell a specified amount of an underlying security at a specified price
within a specified time. This is the opposite of a call option, which gives
the holder the right to buy shares.
A put becomes more valuable as the price of the underlying stock
depreciates relative to the strike price. For example, if you have one
Mar 08 Taser 10 put, you have the right to sell 100 shares of Taser at
$10 until March 2008 (usually the third Friday of the month). If shares
of Taser fall to $5 and you exercise the option, you can purchase 100
shares of Taser for $5 in the market and sell the shares to the option's
writer for $10 each, which means you make $500 (100 x ($10-$5)) on
the put option. Note that the maximum amount of potential profit in
this example ignores the premium paid to obtain the put option.
What Does Warrant Mean?
A derivative security that gives the holder the right to purchase
securities (usually equity) from the issuer at a specific price within a
certain time frame. Warrants are often included in a new debt issue as
a "sweetener" to entice investors.
The main difference between warrants and call options is that warrants
are issued and guaranteed by the company, whereas options are
exchange instruments and are not issued by
the company. Also, the lifetime of a warrant is often measured in
years, while the lifetime of a typical option is measured in months.
Options generally have lives of up to one year, the majority of options
traded on options exchanges having a maximum maturity of nine
months. Longer-dated options are called warrants and are generally
traded over-the-counter.
What Does Rights Mean?
A security giving stockholders entitlement to purchase new shares
issued by the corporation at a predetermined price (normally less than
the current market price) in proportion to the number of shares already
owned. Rights are issued only for a short period of time, after which
they expire.
This also known as "subscription rights" or "share purchase rights".
What Does Swap Mean?
A Swap is an agreement between two parties to exchange sets of cash
flows over a period of time in the future. The two parties that agree to
the Swap agreement are known as counterparties. Swaps are
considered derivative instruments. Similar to Options and Futures,
their value is derived from the value of another financial instrument,
such as securities or foreign currencies.
Traditionally, the exchange of one security for another to change the
maturity ( bonds), quality of issues (stocks or bonds), or because
investment objectives have changed. Recently, swaps have grown to
include currency swaps and interest rate swaps.
Swaps are private agreements between two parties to exchange cash
flows in the future according to a prearranged formula. They can be
regarded as portfolio of forward contracts.
If firms in separate countries have comparative advantages on interest
rats, then a swap could benefit both firms. For example, one firm may
have a lower fixed interest rate, while another has access to a lower
floating interest rate. These firms could swap to take advantage of the
lower rates.
What Does International Swaps and Derivatives Association -
ISDA Mean?
An association created by the private negotiated derivatives market
that represents participating parties. This association helps to improve
the private negotiated derivatives market by identifying and reducing
risks in the market.
Created in 1985, the ISDA has members from institutions around the
world. It was created to improve the private negotiated derivatives
market by making it easier for the institutions that deal in the market
to network.
It is the principal derivatives industry trade organization. ISDA
develops and publishes master agreements for Swaps and other over-
the-counter derivatives contracts. ISDA agreements serve as industry
standard documentation for a variety of financial instruments.
Currency Swap :
A currency swap (or cross currency swap) is a foreign exchange
agreement between two parties to exchange principal and fixed rate
interest payments on a loan in one currency for principal and fixed rate
interest payments on an equal (regarding net present value) loan in
another currency. Currency swaps are motivated by comparative
advantage.
Currency swaps can be negotiated for a variety of maturities of up to
30 years. Unlike a back-to-back loan, a currency swap is not
considered to be a loan by United States accounting laws and thus it is
not reflected on a company's balance sheet. A swap is considered to
be a foreign exchange transaction (short leg) plus an obligation to
close the swap (far leg) being a forward contract.
Unlike interest rate swaps, currency swaps involve the exchange of the
principal amount. Interest payments are not netted (as they are in
interest rate swaps) because they are denominated in different
currencies. Further, many currency swaps are traded on organized
exchanges - lowering counter-party risk, as evidenced by the bid- ask
spread on most listings.
Currency swaps are often combined with interest rate swaps. For
example, one company would seek to swap a cash flow for their fixed
rate debt denominated in US dollars for a floating-rate debt
denominated in Euro. This is especially common in Europe where
companies shop for the cheapest debt regardless of its denomination
and then seek to exchange it for the debt in desired currency.
For example, suppose a U.S.-based company needs to acquire Swiss
francs and a Swiss-based company needs to acquire U.S. dollars. These
two companies could arrange to swap currencies by establishing an
interest rate, an agreed upon amount and a common maturity date for
the exchange. Currency swap maturities are negotiable for at least ten
years, making them a very flexible method of foreign exchange.
Currency swaps were originally done to get around exchange controls.
During the global financial crisis of 2008 currency swaps were offered
to other central banks by the Federal Reserve System including stable
emerging economies such as South Korea, Singapore, Brazil, and
Mexico
What Does Interest Rate Swap Mean?
An agreement between two parties (known as counterparties) where
one stream of future interest payments is exchanged for another
based on a specified principal amount. Interest rate swaps often
exchange a fixed payment for a floating payment that is linked to an
interest rate (most often the LIBOR). A company will typically use
interest rate swaps to limit, or manage, its exposure to fluctuations in
interest rates, or to obtain a marginally lower interest rate than it
would have been able to get without the swap.
Interest rate swaps are simply the exchange of one set of cash flows
(based on interest rate specifications) for another. Because they trade
OTC, they are really just contracts set up between two or more parties,
and thus can be customized in any number of ways.
Let's review a basic Interest Rate Swap example:
Situation: Party A and Party B agree to enter into a Swap agreement
that covers a five-year period and involves annual payments on a $1
million principal amount.
· Party A agrees to pay a fixed interest rate of 12% to Party B.
· In return, Party B agrees to pay a floating rate of LIBOR + 3 % to
Party A.
· Party A pays 12% of $ 1 million , or $120,000 each year to Party B.
Party B makes a payment to Party A in return, but the actual amount of
the payments depends on the movement in LIBOR.
Let's assume that the LIBOR is 10% at the time of the first
payment.
· This means that Party A will pay $120,000 ( $1 million X 12 %) to
Party . · Party B will owe $130,000 ($1 million X 13 %) to Party A. ·
Netting the two obligations, Party B owes $10,000 ($130,000 - $
120,000 ) to Party A.
Generally, only the net payment , the difference between the two
obligations, actually takes place
Foreign Exchange Market :

The foreign exchange market (currency, forex, or FX) is where
currency trading takes place. It is where banks and other official
institutions facilitate the buying and selling of foreign currencies. FX
transactions typically involve one party purchasing a quantity of one
currency in exchange for paying a quantity of another. The foreign
exchange market that we see today started evolving during the 1970s
when world over countries gradually switched to floating exchange
rate from their erstwhile exchange rate regime, which remained fixed
as per the Bretton Woods system till 1971.
Presently, the FX market is one of the largest and most liquid financial
markets in the world, and includes trading between large banks,
central banks, currency speculators, corporations, governments, and
other institutions. The average daily volume in the global foreign
exchange and related markets is continuously growing. Traditional
daily turnover was reported to be over US$3.2 trillion in April 2007 by
the Bank for International Settlements. Since then, the market has
continued to grow. According to Euro money's annual FX Poll, volumes
grew a further 41% between 2007 and 2008
The purpose of FX market is to facilitate trade and investment. The
need for a foreign exchange market arises because of the presence of
multifarious international currencies such as US Dollar, Pound Sterling,
etc., and the need for trading in such currencies
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore
are all important centers as well. Banks throughout the world participate. Currency
trading happens continuously throughout the day; as the Asian trading session ends,
the European session begins, followed by the North American session and then back
to the Asian session, excluding weekends.
Exchange-Traded Fund (ETF) :
A security that tracks an index, a commodity or a basket of assets like
an index fund, but trades like a stock on an exchange. ETFs experience
price changes throughout the day as they are bought and sold.
Because it trades like a stock, an ETF does not have its net asset value
(NAV) calculated every day like a mutual fund does.
By owning an ETF, you get the diversification of an index fund as well
as the ability to sell short, buy on margin and purchase as little as one
share. Another advantage is that the expense ratios for most ETFs are
lower than those of the average mutual fund. When buying and selling
ETFs, you have to pay the same commission to your broker that you'd
pay on any regular order.
Exchange-traded funds (or ETFs) are open ended investment
companies that can be traded at any time throughout the course of the
day. Typically, ETFs try to replicate a stock market index such as the
S&P 500 (e.g., SPY), but recently they are now replicating investments
in the currency markets with the ETF increasing in value when the US
Dollar weakens versus a specific currency, such as the Euro. Certain of
these funds track the price movements of world currencies versus the
US Dollar, and increase in value directly counter to the US Dollar,
allowing for speculation in the US Dollar for US and US Dollar
denominated investors and speculators.
An ETF combines the valuation feature of a mutual fund or unit
investment trust, which can be purchased or redeemed at the end of
each trading day for its net asset value, with the tradability feature of a
closed-end fund, which trades throughout the trading day at prices
that may be more or less than its net asset value. Closed-end funds are
not considered to be exchange-traded funds, even though they are
funds and are traded on an exchange. ETFs have been available in the
US since 1993 and in Europe since 1999. ETFs traditionally have been
index funds, but in 2008 the U.S. Securities and Exchange Commission
began to authorize the creation of actively-managed ETFs.
NASDAQ...
The NASDAQ (acronym of National Association of Securities
Dealers Automated Quotations) is an American stock exchange. It
is the largest electronic screen-based equity securities trading market
in the United States. With approximately 3,800 companies, it has more
trading volume per hour than any other stock exchange in the world.
It was founded in 1971 by the National Association of Securities
Dealers (NASD), who divested themselves of it in a series of sales in
2000 and 2001. It is owned and operated by the NASDAQ OMX Group,
the stock of which was listed on its own stock exchange in 2002, and is
monitored by the Securities and Exchange Commission (SEC). With the
completed purchase of the Nordic-based operated exchange OMX,
following its agreement with Borse Dubai, NASDAQ is poised to capture
67% of the controlling stake in the aforementioned exchange, thereby
inching ever closer to taking over the company and creating a trans-
Atlantic powerhouse. The group, now known as Nasdaq-OMX, controls
and operates the NASDAQ stock exchange in New York City -- the
second largest exchange in the United States. It also operates eight
stock exchanges in Europe and holds one-third of the Dubai Stock
Exchange. It has a double-listing agreement with OMX, and will
compete with NYSE Euro next group in attracting new listings.
NASDAQ has a pre-market session from 07:00am to 09:30am, a normal trading session from 09:30am to
04:00pm and a post-market session from 04:00pm to 08:00pm (all times in EST).
What Does Net Asset Value - NAV Mean?
A mutual fund's price per share or exchange-traded fund's (ETF) per-
share value. In both cases, the per-share dollar amount of the fund is
calculated by dividing the total value of all the securities in its
portfolio, less any liabilities, by the number of fund shares outstanding.
Net asset value (NAV) is a term used to describe the value of an
entity's assets less the value of its liabilities. The term is most
commonly used in relation to open-ended funds, though it may also be
used as a synonym for the book value of a business.
There is no universal method of valuing assets and liabilities for the
purposes of calculating net asset value, and the criteria used for the
valuation will depend upon the circumstances, the purposes of the
valuation and any regulations that may apply.
In terms of corporate valuations, the calculation: value of assets less

liabilities equals net asset value (NAV), or "book value", is used.
In the context of mutual funds, NAV per share is computed once a day
based on the closing market prices of the securities in the fund's
portfolio. All mutual fund’s buy and sell orders are processed at the
NAV of the trade date. However, investors must wait until the following
day to get the trade price.
Mutual funds pay out virtually all of their income and capital gains. As
a result, changes in NAV are not the best gauge of mutual fund
performance, which is best measured by annual total return. Because
ETFs and closed -end funds trade like stocks, their shares trade at
market value, which can be a dollar value above (trading at a
premium) or below (trading at a discount) NAV.
In determining whether shares in a public company are a cheap or
expensive investment, one tool used by investors is a comparison of
the company's current market capitalization (being the price at which
the market values the company) with its NAV. The NAV will usually be
below the market price for the following reasons:
The NAV describes the company's current asset and liability
position. Investors might believe that the company has
significant growth prospects, in which case they would be
prepared to pay more for the company than its NAV.
The current value of a company's assets may be higher than the
historical financial statements used in the NAV calculation.
Certain assets, such as goodwill (which broadly represents a
company's ability to make future profits), are not necessarily
included on a balance sheet and so will not appear in an NAV
calculation.
What Does Merger Mean?
The combining of two or more companies, generally by offering the
stockholders of one company securities in the acquiring company in
exchange for the surrender of their stock.
In business or economics a merger is a combination of two companies
into one larger company. Such actions are commonly voluntary and
involve stock swap or cash payment to the target. Stock swap is often
used as it allows the shareholders of the two companies to share the
risk involved in the deal. A merger can resemble a takeover but result
in a new company name (often combining the names of the original
companies) and in new branding; in some cases, terming the
combination a "merger" rather than an acquisition is done purely for
political or marketing reasons.
What Does Stock Split Mean?
A corporate action in which a company's existing shares are divided
into multiple shares. Although the number of shares outstanding
increases by a specific multiple, the total dollar value of the shares
remains the same compared to pre-split amounts, because no real
value has been added as a result of the split.
In the U.K., a stock split is referred to as a "scrip issue", "bonus issue",
"capitalization issue" or "free issue".
For example, in a 2-for-1 split, each stockholder receives an additional
share for each share he or she holds.
One reason as to why stock splits are performed is that a company's
share price has grown so high that to many investors, the shares are
too expensive to buy in round lots.
For example, if a XYZ Corp.'s shares were worth $1,000 each, investors
would need to purchase $100,000 in order to own 100 shares. If each
share was worth $10, investors would only need to pay $1,000 to own
100 shares.
What Does Reverse Stock Split Mean?
A reduction in the number of a corporation's shares outstanding that
increases the par value of its stock or its earnings per share. The
market value of the total number of shares (market capitalization)
remains the same.
For example, a 1-for-2 reverse split means you get half as many
shares, but at twice the price. It's usually a bad sign if a company is
forced to reverse split - firms do it to make their stock look more
valuable when, in fact, nothing has changed. A company may also do a
reverse split to avoid being delisted.
What Does International Securities Identification Number - ISIN

Mean?
ISIN is A code that uniquely identifies a specific securities issue. The
organization that allocates ISINs in any particular country is the
country's respective National Numbering Agency (NNA). An
International Securities Identification Number (ISIN) uniquely
identifies a security. Its structure is defined in ISO 6166. Securities for
which ISINs are issued include bonds, commercial paper, equities and
warrants. The ISIN code is a 12-character alpha-numerical code that
does not contain information characterizing financial instruments but
serves for uniform identification of a security at trading and
settlement.
Securities with which ISINs can be used include debt securities, shares,
options, derivatives and futures. The ISIN identifies the security, not
the exchange (if any) on which it trades; it is not a ticker symbol. For
instance, Daimler AG stock trades on twenty-two different stock
exchanges worldwide, and is priced in five different currencies; it has
the same ISIN on each, though not the same ticker symbol.
What Does CUSIP Number Mean?
The acronym CUSIP typically refers to both the Committee on
Uniform Security Identification Procedures and the 9-character
alphanumeric security identifiers that they distribute for all North
American securities for the purposes of facilitating clearing and
settlement of trades. The CUSIP distribution system is owned by the
American Bankers Association and is operated by Standard & Poor's.
The CUSIP Service Bureau acts as the National Numbering Association
(NNA) for North America, and the CUSIP serves as the National
Securities Identification Number for products issued from both the
United States and Canada.
In the 1980s there was an attempt to expand the CUSIP system for
international securities as well. The resulting CINS (CUSIP International
Numbering System) has seen little use as it was introduced at about
the same time as the truly international ISIN system. CINS identifiers
do appear in the ISID Plus directory, however.
What Does Depository Trust Company - DTC Mean?

The Depository Trust Company (DTC) – The original depository
clearing corporation. Established in 1973, it was created to reduce
costs and provide efficiencies by immobilizing securities and making
"book-entry" changes to show ownership of the securities. DTC
provides securities movements for NSCC's net settlements, and
settlement for institutional trades (which typically involve money and
securities transfers between custodian banks and broker-dealers), as
well as money market instruments. In 2007, DTC settled transactions
worth $513 trillion, and processed 325 million book-entry deliveries. In
addition to settlement services, DTC retains custody of 3.5 million
securities issues, worth about $40 trillion, including securities issued in
the US and more than 110 other countries. DTC is a member of the
U.S. Federal Reserve System, and a registered clearing agency with
the Securities and Exchange Commission.
One of the world's largest securities depositories, it holds in excess of
US$10 trillion worth of securities in custody. The DTC acts like a
clearinghouse to settle trades in corporate and municipal securities.
DTC is owned by many companies in the financial industry, with the
NYSE being one of its largest shareholders
The Depository Trust & Clearing Corporation (DTCC), based
primarily at 55 Water Street in New York City, is the world’s largest
post-trade financial services company. It was set up to provide an
efficient and safe way for buyers and sellers of securities to make their
exchange, and thus "clear and settle" transactions. It also provides
custody of securities.
User-owned and directed, it automates, centralizes, standardizes, and
streamlines processes that are critical to the safety and soundness of
the world’s capital markets. Through its subsidiaries, DTCC provides
clearance, settlement, and information services for equities, corporate
and municipal bonds, unit investment trusts, government and
mortgage-backed securities, money market instruments, and over-the-
counter derivatives. DTCC is also a leading processor of mutual funds
and insurance transactions, linking funds and carriers with their
distribution networks. DTCC's DTC depository provides custody and
asset servicing for 3.5 million securities issues, comprised mostly of
stocks and bonds, from the United States and 110 other countries and
territories, valued at $40 trillion, more than any other depository in the
world.
In 2007, DTCC settled the vast majority of securities transactions in the
United States, more than $1.86 quadrillion in value. DTCC has
operating facilities in New York City, and at multiple locations in and
outside the U.S.
In 2007 Chief Executive Officer Donald F. Donahue was named to the
additional office of Chairman of DTCC and its subsidiaries, and Chief
Operating Officer William B. Aimetti was named President.
In 2008, The Clearing Corporation and the Depository Trust & Clearing
Corporation announced CCorp members will benefit from CCorp's
netting and risk management processes, and will leverage the asset
servicing capabilities of DTCC's Trade Information Warehouse for credit
default swaps (CDS).
A Custodian Bank :
A custodian bank, or simply custodian, is a financial institution
responsible for safeguarding a firm's or individual's financial assets.
The role of a custodian in such a case would be the following: to hold in
safekeeping assets such as equities and bonds, arrange settlement of
any purchases and sales of such securities, collect information on and
income from such assets (dividends in the case of equities and interest
in the case of bonds), provide information on the underlying companies
and their annual general meetings, manage cash transactions, perform
foreign exchange transactions where required and provide regular
reporting on all their activities to their clients. Custodian banks are
often referred to as global custodians if they hold assets for their
clients in multiple jurisdictions around the world, using their own local
branches or other local custodian banks in each market to hold
accounts for their underlying clients. Assets held in such a manner are
typically owned by pension funds.
The following companies offer custodian bank services:
Bank of New York Mellon
BNP Paribas Securities Services
Fifth Third Bank
Goldman Sachs
HSBC
JPMorgan Chase
Northern Trust
RBC Dexia
Union Bank of California
Standard Bank
State Street Bank & Trust
Wells Fargo Bank
Deutsche Bank
What Does International Swaps and Derivatives Association -

ISDA Mean?
An association created by the private negotiated derivatives market

that represents participating parties. This association helps to improve
the private negotiated derivatives market by identifying and reducing
risks in the market. Created in 1985, the ISDA has members from
institutions around the world. It was created to improve the private
negotiated derivatives market by making it easier for the institutions
that deal in the market to network.
The International Swaps and Derivatives Association (ISDA) is a
trade organization of participants in the market for over-the-counter
derivatives. It is headquartered in New York, and has created a
standardized contract (the ISDA Master Agreement) to enter into
derivatives transactions. There are currently two versions of the ISDA
Master Agreement: the 1992 edition and the 2002 edition. In practical
terms the two are very similar since parties tend to amend their 1992
agreements to incorporate most of the amendments included in the
2002 edition by means of the Schedule (see below). References herein
to sections of the ISDA Master Agreement are references to the 1992
edition unless otherwise stated. The ISDA Master Agreement is a
bilateral framework agreement.
ISDA also produces a credit support annex which further permits parties to an
ISDA Master Agreement to mitigate their credit risk by requiring the party which
is 'out-of-the-money' to post collateral (usually cash, government securities or
highly rated bonds) corresponding to the amount which would be payable by that
party were all the outstanding Transactions under the relevant ISDA Master
Agreement terminated. Collateral other than cash is usually discounted for risk,
that is, the pledgor would have to post collateral in excess of the potential
settlement amount .
What Does Global Depository Receipt - GDR Mean?

1. A bank certificate issued in more than one country for shares in a
foreign company. The shares are held by a foreign branch of an
international bank. The shares trade as domestic shares, but are
offered for sale globally through the various bank branches.
2. A financial instrument used by private markets to raise capital
denominated in either U.S. dollars or euros.
A Global Depository Receipt (GDR) is a certificate issued by a depository bank, which
purchases shares of foreign companies and deposits it on the account. GDRs represent
ownership of an underlying number of shares.
Global Depository Receipts facilitate trade of shares, and are commonly used to invest in
companies from developing or emerging markets.
Prices of GDRs are often close to values of related shares, but they are traded & settled
independently of the underlying share.
Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche
Bank, Bank of New York. They trade on the International Order Book (IOB) of the
London Stock Exchange. Normally 1 GDR = 10 Shares,
What Does American Depositary Receipt - ADR Mean?
A negotiable certificate issued by a U.S. bank representing a specified

number of shares (or one share) in a foreign stock that is traded on a
U.S. exchange. ADRs are denominated in U.S. dollars, with the
underlying security held by a U.S. financial institution overseas. ADRs
help to reduce administration and duty costs that would otherwise be
levied on each transaction. This is an excellent way to buy shares in a
foreign company while realizing any dividends and capital gains in U.S.
dollars. However, ADRs do not eliminate the currency and economic
risks for the underlying shares in another country. For example,
dividend payments in euros would be converted to U.S. dollars, net of
conversion expenses and foreign taxes and in accordance with the
deposit agreement. ADRs are listed on either the NYSE, AMEX or
Nasdaq.
An American Depository Receipt (or ADR) represents the
ownership in the shares of a foreign company trading on US financial
markets. The stock of many non-US companies trades on US
exchanges through the use of ADRs. ADRs enable US investors to buy
shares in foreign companies without undertaking cross-border
transactions. ADRs carry prices in US dollars, pay dividends in US
dollars, and can be traded like the shares of US-based companies.
Each ADR is issued by a US depositary bank and can represent a
fraction of a share, a single share, or multiple shares of foreign stock.
An owner of an ADR has the right to obtain the foreign stock it
represents, but US investors usually find it more convenient simply to
own the ADR. The price of an ADR is often close to the price of the
foreign stock in its home market, adjusted for the ratio of ADRs to
foreign company shares. In the case of companies incorporated in the
United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve
tax (SDRT) charge by the UK government.
Depositary banks have numerous responsibilities to an ADR holder and
to the non-US company the ADR represents. The first ADR was
introduced by JPMorgan in 1927, for the British retailer Selfridges&Co.
There are currently four major commercial banks that provide
depositary bank services - JPMorgan, Citibank, Deutsche Bank and the
Bank of New York Mellon. Individual shares of a foreign corporation
represented by an ADR are called American Depositary Shares (ADS).
What Does Private Placement Mean?
Raising of capital via private rather than public placement. The result is
the sale of securities to a relatively small number of investors.
Investors involved in private placements are usually large banks,
mutual funds, insurance companies, and pension funds.
Since a private placement is offered to a few, select individuals, the
placement does not have to be registered with the Securities and
Exchange Commission. In many cases detailed financial information is
not disclosed and a the need for a prospectus is waived. Finally since
the placements are private rather than public, the average investor is
only made aware of the placement usually after it has occurred.
In the United States, a private placement is an offering of securities
that are not registered with the Securities and Exchange Commission
(SEC). Such offerings exploit an exemption offered by the Securities
Act of 1933 that comes with several restrictions, including a prohibition
against general solicitation. This exemption allows companies to avoid
quarterly reporting requirements and many of the legal liabilities
associated with the Sarbanes-Oxley Act. The SEC passed Regulation D
(Reg D) in 1982 which clarifies how companies can be sure they are
exempt from registration under the Securities Act. Regulation D does
include a notification requirement in Rule 503.
Private placements offer "units", where a "unit" is (again, typically)
comprised of 1 common share and one-half or one warrant. The
warrant is usually good for buying 1 common share at a specified price
and has a validity period. An example would be a unit that includes
one-half a warrant, where one whole warrant is good for purchasing 1
common share at 56 cents in the 24 months following the private
placement closing.
What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced

investment strategies such as leveraged, long, short and derivative
positions in both domestic and international markets with the goal of
generating high returns (either in an absolute sense or over a specified
market benchmark).
Legally, hedge funds are most often set up as private investment
partnerships that are open to a limited number of investors and require
a very large initial minimum investment. Investments in hedge funds
are illiquid as they often require investors keep their money in the fund
for at least one year.
For the most part, hedge funds (unlike mutual funds) are unregulated
because they cater to sophisticated investors. In the U.S., laws require
that the majority of investors in the fund be accredited. That is, they
must earn a minimum amount of money annually and have a net worth
of more than $1 million, along with a significant amount of investment
knowledge. You can think of hedge funds as mutual funds for the super
rich. They are similar to mutual funds in that investments are pooled
and professionally managed, but differ in that the fund has far more
flexibility in its investment strategies.
It is important to note that hedging is actually the practice of
attempting to reduce risk, but the goal of most hedge funds is to
maximize return on investment. The name is mostly historical, as the
first hedge funds tried to hedge against the downside risk of a bear
market by shorting the market (mutual funds generally can't enter into
short positions as one of their primary goals). Nowadays, hedge funds
use dozens of different strategies, so it isn't accurate to say that hedge
funds just "hedge risk". In fact, because hedge fund managers make
speculative investments, these funds can carry more risk than the
overall market.
What Does Short-Term Investment Fund - STIF Mean?
A Short-Term Investment Fund is a type of investment fund which
invests in money market investments of high quality and low risk. They
are commonly used by investors to temporarily store funds while
arranging for their transfer to another investment vehicle that will
provide higher returns. The goal of this type of fund is to protect
capital with low-risk investments while achieving a return that beats a
relevant benchmark such as a Treasury bill index.
This type of fund aims to protect capital while generating a return that
compares favorably with a particular benchmark, such as a Treasury
Bill index. These types of fund have low management fees (usually well
beneath 1% p.a.) and relatively low rates of return, commensurate
with their low-risk investment style.
What Does Short Selling Mean?

The selling of a security that the seller does not own, or any sale that is
completed by the delivery of a security borrowed by the seller. Short
sellers assume that they will be able to buy the stock at a lower
amount than the price at which they sold short.
Selling short is the opposite of going long. That is, short sellers make
money if the stock goes down in price.
This is an advanced trading strategy with many unique risks and
pitfalls. Novice investors are advised to avoid short sales.
In finance, short selling or "shorting" is the practice of selling a
financial instrument that the seller does not own at the time of the
sale. Short selling is done with the intent of later purchasing the
financial instrument at a lower price. Short-sellers attempt to profit
from an expected decline in the price of a financial instrument. Short
selling or "going short" is contrasted with the more conventional
practice of "going long", which typically occurs when a financial
instrument is purchased with the expectation that its price will rise.
Thus, being "long" is just a way of saying that you own a positive
number of the securities; being "short" is just a way of saying that you
own a negative number of the securities.
For example, assume that shares in XYZ Company currently sell for
$10 per share. A short seller would borrow 100 shares of XYZ
Company, and then immediately sell those shares for a total of $1000.
If the price of XYZ shares later falls to $8 per share, the short seller
would then buy 100 shares back for $800, return the shares to their
original owner and make a $200 profit (minus borrowing fees). This
practice has the potential for losses as well. For example, if the shares
of XYZ that one borrowed and sold in fact went up to $25, the short
seller would have to buy back all the shares at $2500, losing $1500.
What Does Commercial Paper Mean?
In the global money market, commercial paper is an unsecured
promissory note with a fixed maturity of one to 270 days. Commercial
Paper is a money-market security issued (sold) by large banks and
corporations to get money to meet short term debt obligations (for
example, payroll), and is only backed by an issuing bank or
corporation's promise to pay the face amount on the maturity date
specified on the note. Since it is not backed by collateral, only firms
with excellent credit ratings from a recognized rating agency will be
able to sell their commercial paper at a reasonable price. Commercial
paper is usually sold at a discount from face value, and carries shorter
repayment dates than bonds. The longer the maturity on a note, the
higher the interest rate the issuing institution must pay. Interest rates
fluctuate with market conditions, but are typically lower than banks'
rates.
It is an unsecured, short-term debt instrument issued by a corporation,
typically for the financing of accounts receivable, inventories and
meeting short-term liabilities. Maturities on commercial paper rarely
range any longer than 270 days. The debt is usually issued at a
discount, reflecting prevailing market interest rates.
Commercial paper is not usually backed by any form of collateral, so
only firms with high-quality debt ratings will easily find buyers without
having to offer a substantial discount (higher cost) for the debt issue.
A major benefit of commercial paper is that it does not need to be

registered with the Securities and Exchange Commission (SEC) as long
as it matures before nine months (270 days), making it a very cost-
effective means of financing. The proceeds from this type of financing
can only be used on current assets (inventories) and are not allowed to
be used on fixed assets, such as a new plant, without SEC involvement.
Repo Rate :
Repo rate is the rate at which the banks can borrow money from a
central bank of the country in order to avoid scarcity of funds.For eg,
whenever the banks have any shortage of funds they can borrow it
from Reserve Bank of India (RBI). Thus Repo rate is the rate at which
our banks borrow rupees from RBI. A reduction in the repo rate will
help banks to get money at a cheaper rate. When the repo rate
increases borrowing from RBI becomes more expensive. It is also a
financial & economic tool in the hands of government to control the
availability of money supply in the market by altering the repo rate
from time to time.
The Repo Rate has been cut to 4.75% w.e.f. April 21st 2009
Bank Rate :
Bank rate, also referred to as the discount rate, is the rate of interest
which a central bank charges on the loans and advances that it
extends to commercial banks and other financial intermediaries.
Changes in the bank rate are often used by central banks to control
the money supply.
Various Uses for the Term "Bank Rate" -
The term bank rate is most commonly used by bankers to refer to the
Federal Discount Rate of interest charged to Federally Chartered
Savings Banks. The term bank rate is commonly used by consumers to
refer to the current rate of interest given on a savings certificate of
Deposit. The term bank rate is most commonly used by consumers
who are interested in either obtaining a purchase money mortgage, or
a refinance loan, when referring to the current mortgage rate.
Types of Bank Interest Rates -
Bank rate on a Certificate of Deposit "CD".
Bank Rate on a credit card or other loan
Bank Rate on an automobile or real estate loan
used to have a close relation with consumers Bank Rate[current rate of
interest]. With an increase in Bankers Bank Rate the Consumers Bank
Rate also used to increase. With vast changes in Bank Financial
Structure and with less dependency on Central Bank for financing
customers credit, the control on Bankers Bank Rate has very less
impact on Consumers Bank Rate.
Consumer Use of the Current Bank Rate -
Consumers will check the current "Bank Rate" by comparing CD rates
in the local newspaper or by visiting website's online, in order to
determine which will pay the highest Annual Yield on their savings.
Consumers will compare mortgage interest rates by visiting mortgage
websites that show the various rates of interest of mortgage
companies.
Difference between Bank Rate and Repo Rate -
While repo rate is a short-term measure, i.e. applicable to short-term
loans and used for controlling the amount of money in the market,
bank rate is a long-term measure and is governed by the long-term
monetary policies of the governing bank concerned.
What Does Capitalization Mean?

" A company's outstanding shares multiplied by its share price,
better known as "market capitalization".
If a company has 1,000,000 shares and is currently trading at
$10 a share, their market capitalization is $10,000,000.
What Does Market Capitalization Mean?
The total dollar market value of all of a company's outstanding
shares. Market capitalization is calculated by multiplying a
company's shares outstanding by the current market price of
one share. The investment community uses this figure to
determining a company's size, as opposed to sales or total
asset figures.
Frequently referred to as "market cap".
Company size is a basic determinant of asset allocation and
risk-return parameters for stocks and stock mutual funds. The
term should not be confused with a company's "capitalization,"
which is a financial statement term that refers to the sum of a
company's shareholders' equity plus long-term debt.
The stocks of large, medium and small companies are referred
to as large-cap, mid-cap, and small-cap, respectively.
Investment professionals differ on their exact definitions, but
the current approximate categories of market capitalization
are:
Large Cap: $10 billion plus and include the companies with the
largest market capitalization.
Mid Cap: $2 billion to $10 billion
Small Cap: Less than $2 billion
What Does Small Cap Mean?
Refers to stocks with a relatively small market capitalization. The
definition of small cap can vary among brokerages, but generally it is a
company with a market capitalization of between $300 million and $2
billion.
One of the biggest advantages of investing in small-cap stocks is the
opportunity to beat institutional investors. Because mutual funds have
restrictions that limit them from buying large portions of any one
issuer's outstanding shares, some mutual funds would not be able to
give the small cap a meaningful position in the fund. To overcome
these limitations, the fund would usually have to file with the SEC,
which means tipping its hand and inflating the previously attractive
price.
What Does Mid Cap Mean?
A company with a market capitalization between $2 and $10 billion,
which is calculated by multiplying the number of a company's shares
outstanding by its stock price. Mid cap is an abbreviation for the term
"middle capitalization".
As the name implies, a mid cap company is in the middle of the pack
between large cap and small cap companies.
Keep in mind that classifications such as large cap, mid cap and small
cap are only approximations that change over time. Also, the exact
definition of these terms can vary among the various participants in
the investment business.
What Does Inflation Mean?

The rate at which the general level of prices for goods and services is
rising, and, subsequently, purchasing power is falling. Central banks
attempt to stop severe inflation, along with severe deflation, in an
attempt to keep the excessive growth of prices to a minimum.
As inflation rises, every dollar will buy a smaller percentage of a good.
For example, if the inflation rate is 2%, then a $1 pack of gum will cost
$1.02 in a year.
Most countries' central banks will try to sustain an inflation rate of 2-
3%.
A loss of purchasing power in the internal medium of exchange which
is also the monetary unit of account in an economy. A chief measure of
general price-level inflation is the general inflation rate, which is the
percentage change in a general price index (normally the Consumer
Price Index) over time.
Inflation can have adverse effects on an economy. For example,
uncertainty about future inflation may discourage investment and
saving. High inflation may lead to shortages of goods if consumers
begin hoarding out of concern that prices will increase in the future.
Origin of Inflation :
Inflation originally referred to the debasement of the currency. When
gold was used as currency, gold coins could be collected by the
government (e.g. the king or the ruler of the region), melted down,
mixed with other metals such as silver, copper or lead, and reissued at
the same nominal value. By diluting the gold with other metals, the
government could increase the total number of coins issued without
also needing to increase the amount of gold used to make them. When
the cost of each coin is lowered in this way, the government profits
from an increase in seigniorage ( It is the net revenue derived from the
issuing of currency). This practice would increase the money supply
but at the same time lower the relative value of each coin. As the
relative value of the coins decrease, consumers would need more coins
to exchange for the same goods and services. These goods and
services would experience a price increase as the value of each coin is
reduced.
By the nineteenth century, economists categorized three separate
factors that cause a rise or fall in the price of goods: a change in the
value or resource costs of the good, a change in the price of money
which then was usually a fluctuation in metallic content in the
currency, and currency depreciation resulting from an increased supply
of currency relative to the quantity of redeemable metal backing the
currency. Following the proliferation of private bank note currency
printed during the American Civil War, the term "inflation" started to
appear as a direct reference to the currency depreciation that occurred
as the quantity of redeemable bank notes outstripped the quantity of
metal available for their redemption. The term inflation then referred
to the devaluation of the currency, and not to a rise in the price of
goods.
This relationship between the over-supply of bank notes and a
resulting depreciation in their value was noted by earlier classical
economists such as David Hume and David Ricardo, who would go on
to examine and debate to what effect a currency devaluation (later
termed monetary inflation) has on the price of goods (later termed
price inflation, and eventually just inflation).
What Does Deflation Mean?
A general decline in prices, often caused by a reduction in the supply
of money or credit. Deflation can be caused also by a decrease in
government, personal or investment spending. The opposite of
inflation, deflation has the side effect of increased unemployment
since there is a lower level of demand in the economy, which can lead
to an economic depression. Central banks attempt to stop severe
deflation, along with severe inflation, in an attempt to keep the
excessive drop in prices to a minimum.
The decline in prices of assets, is often known as Asset Deflation.
Declining prices, if they persist, generally create a vicious spiral of
negatives such as falling profits, closing factories, shrinking
employment and incomes, and increasing defaults on loans by
companies and individuals. To counter deflation, the Federal Reserve
(the Fed) can use monetary policy to increase the money supply and
deliberately induce rising prices, causing inflation. Rising prices
provide an essential lubricant for any sustained recovery because
businesses increase profits and take some of the depressive pressures
off wages and debtors of every kind.
Deflationary periods can be both short or long, relatively speaking.
Japan, for example, had a period of deflation lasting decades starting in
the early 1990's. The Japanese government lowered interest rates to
try and stimulate inflation, to no avail.
What Does Special Drawing Rights - SDR Mean?

It an international type of monetary reserve currency, created by the
International Monetary Fund (IMF) in 1969, which operates as a
supplement to the existing reserves of member countries. Created in
response to concerns about the limitations of gold and dollars as the
sole means of settling international accounts, SDRs are designed to
augment international liquidity by supplementing the standard reserve
currencies.
You can think of SDRs as an artificial currency used by the IMF and
defined as a "basket of national currencies". The IMF uses SDRs for
internal accounting purposes. SDRs are allocated by the IMF to its
member countries and are backed by the full faith and credit of the
member countries' governments.
SDRs are defined in terms of a basket of major currencies used in
international trade and finance. At present, the currencies in the
basket are, by weight, the United States dollar, the Euro, the Japanese
yen, and the pound sterling. Before the introduction of the Euro in
1999, the Deutsche Mark and the French franc were included in the
basket. The amounts of each currency making up one SDR are chosen
in accordance with the relative importance of the currency in
international trade and finance. The determination of the currencies in
the SDR basket and their amounts is made by the IMF Executive Board
every five years.
The exact amounts of each currency in the basket, and their
approximate relative contributions to the value of an SDR, in the past
were and currently are.
Purpose:
SDRs are used as a unit of account by the IMF and several other
international organizations. A few countries peg their currencies
against SDRs, and it is also used to denominate some private
international financial instruments. For example, the Warsaw
convention, which regulates liability for international carriage of
persons, luggage or goods by air uses SDRs to value the maximum
liability of the carrier.
In Europe, the Euro is displacing the SDR as a basis to set values of
various currencies, including Latvian lats. This is a result of the ERM II
convergence criteria which now apply to states entering the European
Union.
SDRs were originally created to replace Gold and Silver in large
international transactions. Being that under a strict (international) gold
standard, the quantity of gold worldwide is relatively fixed, and the
economies of all participating IMF members as an aggregate are
growing, a perceived need arose to increase the supply of the basic
unit or standard proportionately. Thus SDRs, or "paper gold", are
credits that nations with balance of trade surpluses can 'draw' upon
nations with balance of trade deficits.
So-called "paper gold" is little more than an accounting transaction
within a ledger of accounts, which eliminates the logistical and security
problems of shipping gold back and forth across borders to settle
national accounts.
It has also been suggested that having holders of US dollars convert
those dollars into SDRs would allow diversification away from the dollar
without accelerating the decline of the value of the dollar.
Nostro and Vostro accounts :
Nostro and vostro (Middle Italian, from Latin, noster and voster;
English, ours and yours) are accounting terms used to distinguish an
account you hold for another entity from an account another entity
holds for you. The entities in question are almost always, but need not
be, banks.
It helps to recall that the term account refers to a record of
transactions, whether current, past or future, and whether in money, or
shares, or other countable commodities. Originally a bank account just
meant the record kept by a banker of the money they were holding on
behalf of a customer, and how that changed as the customer made
deposits and withdrawals (the money itself probably being in the form
of specie, such as gold and silver coin).
Some customers will keep their own records of their transactions, for
instance, so they can check for errors by the bank. That record kept by
the customer is also an account, of the money the bank is holding for
them. When that customer is another bank, since they also keep other
accounts (of the money they are holding for their customers) there is a
need to clearly differentiate between these two types of accounts.
The terms nostro and vostro remove the potential ambiguity when
referring to these two separate accounts of the same balance and set
of transactions. Speaking from the bank's point-of-view:
A nostro is our account of our money, held by you.
A vostro is our account of your money, held by us.
Note that all "bank accounts" as the term is normally understood,
including personal or corporate chequing, loan, and savings accounts,
are treated as vostros by the bank. They also regard as vostro purely
internal funds such as treasury, trading and suspense accounts;
although there is no "you" in the sense of an external customer, the
money is still "held by us".
Interestingly, a bank customer who keeps a parallel record of their
chequing account or credit card at home in order to, say, verify their
statements, is in theory keeping a nostro account.
The International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international organization
that oversees the global financial system by following the
macroeconomic policies of its member countries, in particular those
with an impact on exchange rates and the balance of payments. It is
an organization formed to stabilize international exchange rates and
facilitate development. It also offers highly leveraged loans mainly to
poorer countries. Its headquarters are located in Washington, D.C.,
USA.
The International Monetary Fund was created in July of 1944,originally
with 46 members, with a goal to stabilize exchange rates and assist
the reconstruction of the world's international payment system.
Countries contributed to a pool which could be borrowed from, on a
temporary basis, by countries with payment imbalances. (Condon,
2007)
The IMF describes itself as "an organization of 185 countries
(Montenegro being the 185th, as of January 18, 2007), working to
foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable
economic growth, and reduce poverty". With the exception of Taiwan
(expelled in 1980), North Korea, Cuba (left in 1964), Andorra, Monaco,
Liechtenstein, Tuvalu and Nauru, all UN member states participate
directly in the IMF. Most are represented by other member states on a
24-member Executive Board but all member countries belong to the
IMF's Board of Governors.
Today :
The IMF's influence in the global economy steadily increased as it
accumulated more members. The number of IMF member countries
has more than quadrupled from the 44 states involved in its
establishment, reflecting in particular the attainment of political
independence by many developing countries and more recently the
collapse of the Soviet bloc. The expansion of the IMF's membership,
together with the changes in the world economy, have required the
IMF to adapt in a variety of ways to continue serving its purposes
effectively.
In 2008, faced with a shortfall in revenue, the International Monetary
Fund's executive board agreed to sell part of the IMF's gold reserves.
On April 27, 2008, IMF Managing Director Dominique Strauss-Kahn
welcomed the board's decision April 7, 2008 to propose a new
framework for the fund, designed to close a projected $400 million
budget deficit over the next few years. The budget proposal includes
sharp spending cuts of $100 million until 2011 that will include up to
380 staff dismissals.
At the 2009 G-20 London summit, it was decided that the IMF would
require additional financial resources to meet prospective needs of its
member countries during the ongoing global crisis. As part of that
decision, the G-20 leaders pledged to increase the IMF's supplemental
cash tenfold to $500 billion, and to allocate to member countries
another $250 billion via Special Drawing Rights.
Over-the-counter -
Over-the-counter (OTC) trading is to trade financial instruments such

as stocks, bonds, commodities or derivatives directly between two
parties. It is contrasted with exchange trading, which occurs via
facilities constructed for the purpose of trading (i.e., exchanges), such
as futures exchanges or stock exchanges
OTC-traded stocks:
In the U.S., over-the-counter trading in stock is carried out by market
makers that make markets in OTCBB and Pink Sheets securities using
inter-dealer quotation services such as Pink Quote (operated by Pink
OTC Markets) and the OTC Bulletin Board (OTCBB). OTC stocks are not
usually listed or traded on any stock exchange, though exchange listed
stocks can be traded OTC on the third market. Although stocks quoted
on the OTCBB must comply with SEC reporting requirements, other
OTC stocks, such as those stocks categorized as Pink Sheets securities,
have no reporting requirements, while those stocks categorized as
OTCQX have met alternative disclosure guidelines through Pink OTC
Markets.
OTC contracts:
An over-the-counter contract is a bilateral contract in which two parties
agree on how a particular trade or agreement is to be settled in the
future. It is usually from an investment bank to its clients directly.
Forwards and swaps are prime examples of such contracts. It is mostly
done via the computer or the telephone. For derivatives, these
agreements are usually governed by an International Swaps and
Derivatives Association agreement.
This segment of the OTC market is occasionally referred to as the
"Fourth Market."
The NYMEX has created a clearing mechanism for a slate of commonly
traded OTC energy derivatives which allows counterparties of many
bilateral OTC transactions to mutually agree to transfer the trade to
ClearPort, the exchange's clearing house, thus eliminating credit and
performance risk of the initial OTC transaction counterparts.
What Does Spot Market Mean?
The spot market or cash market is a commodities or securities market
in which goods are sold for cash and delivered immediately. Contracts
bought and sold on these markets are immediately effective. Spot
markets can operate wherever the infrastructure exists to conduct the
transaction. The spot market for most securities exists primarily on the
Internet.
A commodities or securities market in which goods are sold for cash
and delivered immediately. Contracts bought and sold on these
markets are immediately effective.
The spot market is also called the "cash market" or "physical
market", because prices are settled in cash on the spot at
current market prices, as opposed to forward prices.
Examples -
Spot Forex :
The spot foreign exchange market has a 2 day delivery date, originally
due to the time it would take to move cash from one bank to another.
Energy Spot :
The spot energy market allows producers of surplus energy to instantly
locate available buyers for this energy, negotiate prices within
milliseconds and deliver actual energy to the customer just a few
minutes later. Spot markets can be either privately operated or
controlled by industry organizations or government agencies. They
frequently attract speculators, since spot market prices are known to
the public almost as soon as deals are transacted. Examples of energy
spot markets for natural gas in Europe are the Title Transfer Facility
(TTF) in the Netherlands and the National Balancing Point (NBP) in the
United Kingdom.
Gold Standard :
A monetary system in which a country's government allows its
currency unit to be freely converted into fixed amounts of gold and
vice versa. The exchange rate under the gold standard monetary
system is determined by the economic difference for an ounce of gold
between two currencies. The gold standard was mainly used from 1875
to 1914 and also during the interwar years.
The use of the gold standard would mark the first use of formalized
exchange rates in history. However, the system was flawed because
countries needed to hold large gold reserves in order to keep up with
the volatile nature of supply and demand for currency.
Disadvantages :
The total amount of gold that has ever been mined has been estimated
at around 142,000 tonnes. Assuming a gold price of US$1,000 per
ounce, or $32,500 per kilogram, the total value of all the gold ever
mined would be around $4.5 trillion. This is less than the value of
circulating money in the U.S. alone, where more than $8.3 trillion is in
circulation or in deposit. Therefore, a return to the gold standard, if
also combined with a mandated end to fractional reserve banking,
would result in a significant increase in the current value of gold, which
may limit its use in current applications. For example, instead of using
the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per
ounce (or $1,000 per 1/2 ounce) effectively raising the value of gold to
$8 trillion. However, this is specifically a disadvantage of return to the
gold standard and not the efficacy of the gold standard itself. Some
gold standard advocates consider this to be both acceptable and
necessary whilst others who are not opposed to fractional reserve
banking argue that only base currency and not deposits would need to
be replaced. The amount of such base currency is only about one tenth
as much as the figure listed above.
Most mainstream economists believe that economic recessions can be
largely mitigated by increasing money supply during economic
downturns. Following a gold standard would mean that the amount of
money would be determined by the supply of gold, and hence
monetary policy could no longer be used to stabilize the economy in
times of economic recession.
Monetary policy would essentially be determined by the rate of gold
production. Fluctuations in the amount of gold that is mined could
cause inflation if there is an increase, or deflation if there is a
decrease. Some hold the view that this contributed to the severity and
length of the Great Depression.
Some have contended that the gold standard may be susceptible to
speculative attacks when a government's financial position appears
weak. For example, some believe the United States was forced to raise
its interest rates in the middle of the Great Depression to defend the
credibility of its currency.
If a country wanted to devalue its currency, it would produce sharper
changes, in general, than the smooth declines seen in fiat currencies,
depending on the method of devaluation.
After World War II, a modified version of the gold standard monetary
system, the Bretton Woods monetary system, was created as its
successor. This successor system was initially successful, but because
it also depended heavily on gold reserves, it was abandoned in 1971
when U.S president Nixon "closed the gold window".

Capital Market Concepts

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Capital Market Concepts

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Let's understand the Concept...

What Does Secondary Market Mean?

A market where investors purchase securities or assets from other

Secondary markets exist for other securities as well, such as when

Let's understand the Concept...

What Does Debt Mean?

What Does Debt Security Mean?

The interest rate on a debt security is largely determined by the

Debt securities on the whole are safer investments than equity

What Does Money Market Mean?

The money market is used by a wide array of participants, from a

What Does Money Market Fund Mean?

Let's understand the Concept...

Mandatory distributions of income and realized capital gains made to

What Does Dividend Yield Mean?

To better explain the concept, refer to this dividend yield example: If two

What Does Interest Mean?

What Does Accrued Interest Mean?

For example, accrued interest receivable occurs when interest on an

In short, A Corporate Action is any pending or completed action taken

Physical status change : An action affecting the physical status of a

Corporate Action - Important Dates!

Declaration Date : This is the date the corporation's board of

Record Date : A corporation's board of directors establishes this date

Effective Date : This is the date that a Corporate Action is effective.

What Does Mortgage-Backed Security (MBS) Mean?

What Does Commercial Mortgage-Backed Securities (CMBS)

What Does Residential Mortgage-Backed Security (RMBS)

What Does Paydown Mean?

What Does Original Face Mean?

What Does Current Face Mean?

For example, suppose that two mortgage-backed securities (MBS 1 and

Let's understand the Concept...

What Does Index Mean?

In Market capitalization weighted index method, index is calculated

A market index is very important for its use.

Let's understand the Concept...

What Does Futures Mean?

In terms of speculation, option buyers and writers have conflicting

Foreign Exchange Market :

In terms of corporate valuations, the calculation: value of assets less

What Does International Securities Identification Number - ISIN

What Does Depository Trust Company - DTC Mean?

What Does International Swaps and Derivatives Association -

An association created by the private negotiated derivatives market

What Does Global Depository Receipt - GDR Mean?

A negotiable certificate issued by a U.S. bank representing a specified

An aggressively managed portfolio of investments that uses advanced

What Does Short Selling Mean?

A major benefit of commercial paper is that it does not need to be

What Does Capitalization Mean?

What Does Inflation Mean?

What Does Special Drawing Rights - SDR Mean?

The International Monetary Fund (IMF)

Over-the-counter (OTC) trading is to trade financial instruments such

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