Book of financial terms PDF
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Book of Financial Terms Fourth Edition Book of Financial Terms Fourth Edition Surendra Sundararajan M.S. Patel Institute of Management Studies Faculty of Management Studies The M.S. University of Baroda Baroda Tata McGraw Hill Education Private Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto Published by Tata McGraw Hill Education Private Limited, 7 West Patel Nagar, New Delhi 110 008. Copyright © 2010, 2004, 2000, 1997 by Tata McGraw Hill Education Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw Hill Education Private Limited. ISBN (13): 978-0-07-070708-5 ISBN (10): 0-07-070708-1 Vice President and Managing Director—Asia-Pacific Region: Ajay Shukla Executive Publisher—Professional: R Chandra Sekhar Manager—Production: Sohan Gaur Manager—Sales and Marketing: S Girish Asst. Product Manager—BGR: Priyanka Goel General Manager—Production: Rajender P Ghansela Assistant General Manager—Production: B L Dogra Information contained in this work has been obtained by Tata McGraw Hill, from sources believed to be reliable. However, neither Tata McGraw Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Tej Composers, WZ-391, Madipur, New Delhi 110063, and printed at Adarsh Printers, C-50-51, Mohan Park, Naveen Shahdara, Delhi-110032 Cover Printer: Rashtriya Printers Cover Designer: Kapil Gupta RAXLCRQZRZBLC PREFACE TO THE FOURTH EDITION The world of finance crossed uncharted territory in the last decade. By the year 2000, stock markets had scaled new peaks in the US, Germany, France and other countries. Markets in India, Japan and elsewhere were also on the rise during that time. Though some of the markets underwent corrections after their dizzying ascent, the developments gave rise to new concerns. Central bankers began to worry about asset bubbles and debated on ways to quell them. Then it was the turn of housing prices which soared across Europe, the US, Russia, India, China and Canada. Not to be left out, commodity prices also took off on a steep trajectory, perhaps fuelled by the surging economic growth and massive infrastructure spending in India and China. Capital flows to the emerging economic stars surged, posing a dilemma, rather “trilemma”, for monetary policy. Meanwhile, some countries which had benefitted from soaring commodity prices and export surpluses created Sovereign Wealth Funds to pick up underpriced stocks, especially in western countries. Then, quite suddenly, the western financial market was hit by a massive meteor, in the form of the subprime crisis, which brutally wrecked reputed financial institutions. There were immediate and serious repercussions—economic growth across the world was suddenly choked and bank credit dried up. Rattled governments reacted by casting aside the free market philosophy and embracing Keynesian economics, which translated into bailout packages and stimulus programmes. Though severe in its impact, the meteor did turn out to be a rich lode of financial terms: Collateralized Debt Obligations, Credit Default Swaps, Toxic Assets, Carry-trade ... which began to feature prominently in media reports. Even as India coped with the economic crisis, new initiatives, such as, a council for maintaining financial stability, a thrust to financial inclusion and the Goods and Services Tax emerged. These developments across the globe signaled the need to offer an updated edition of this book. New terms have been included which capture vi � Preface to the Fourth Edition the events surveyed in the preceding paragraphs; existing terms have also been updated. S S URENDRA UNDARARAJAN PREFACE TO THE FIRST EDITION The financial scene in India has changed dramatically with the advent of economic liberalization and financial sector reforms. The impact on the various constituents of the financial system is conspicuous—be it the financial markets, the financial instruments, the financial intermediaries or the participants, which include the government, the corporate sector, and the individuals. New instruments and financing techniques such as SDO, RUF/NIF, Bought-out deals, and Securitization, have come to the fore. New institutions, such as the National Stock Exchange and the Securities Trading Corporation of India, have been estab- lished. Banks and finance companies are coming to terms with unfamiliar rules relating to capital adequacy, income recognition, and provisioning. The government has started borrowing at mar- ket rates and is emulating the private sector by issuing zero-coupon securities. Special purpose mutual funds have been floated. Mean- while, for the corporate sector, there’s something new and bewitch- ing—Euro Issues! These developments have heightened people’s interest in economic and financial matters. The urge to improve personal financial planning in an era of persistent inflation, motivates many individuals to seek and assimilate new information. Their interest now extends to issues such as the size and significance of the budget deficit and the gross fiscal deficit. This voracious appetite for knowledge is even more evident among university students. In today’s competitive world, many want to know all about derivatives even as they are learning the rudiments of finance. And so, there is intense curiosity about options, futures, caps, floors, collars, swaptions, and all! This book is a modest effort at bridging the information gap, alluded to the above. It brings together terminology from corporate finance, investments, public finance, and financial economics. The terms are alphabetically arranged to facilitate quick access. Further, several related terms have been clubbed together under the subject viii � Preface to the First Edition index that appears at the end of the book. For the more interested reader, there are six important appendices covering topics such as calculating yields, hedging strategies, and financial ratios. Although I embarked on this project about three years ago, I have strived to keep the contents as current as possible. For this, I have depended considerably on newspapers, particularly The Economic Times, besides books and periodicals mentioned in the bibliography. I feel a deep sense of gratitude towards all those people who have taken an interest in this project. My faculty Dean, Prof M M Dadi and my colleagues, Prof Kiran Joshi and Ms Meenakshi Chauhan, encouraged me to persevere with this exacting task. Prof Joshi also offered useful suggestions from time to time. I am also immensely thankful to Mr Varadarajan R Iyengar of Merit Services, Baroda, for the word processing facilities, and to my nephew Rajesh Rangaswamy for typing the manuscript. I also acknowledge the typing assistance rendered in the earlier stages by Nilkanth Jugdan, Atique Khan, and Jacob Mathew. The guiding principle in writing this book has been that it should be useful to students, professionals, bankers and investors. I hope their need is well served. S S URENDRA UNDARARAJAN CONTENTS Preface to the Fourth Edition v Preface to the First Edition vii Book of Financial Terms 1-254 Appendix I 255 Appendix II 259 Appendix III 265 Appendix IV 267 Appendix V 271 Appendix VI 273 Bibliography 275 Subject-wise Listing 281
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