Glossary (4)

 Glossary

Inside information—information unavailable to the public, upon which it is illegal to base transactions 

Institutional investors —money managers, pension fund managers, and managers of mutual funds 

Intangible asset—an asset without physical presence; examples include intellectual property rights (patents) or going-concern value (goodwill) 

Interest—payment for the use of borrowed money 

Interest-coverage ratio—the ratio of pretax earnings to interest expense 

Interest-only mortgage security (IO)—interest payments stripped from a pool of mortgages which, for a given change in interest rates, fluctuates in value inversely to conventional mortgages (see principal-only mortgage security) 

Interest rate reset—a promise made by an issuer to adjust the coupon on a bond at a specified future date in order to cause it to trade at a predetermined price 

Internal rate of return (IRR)—calculation of the rate of return of an investment that assumes reinvestment of cash flows at the same rate of return the investment itself offers 

Investment—an asset purchased to provide a return; investments, in contrast to speculations, eventually generate cash flow for the benefit of the owners (see speculation) 

Investment banking—profession involving raising capital for companies as well as underwriting and trading securities, arranging for the purchase and sale of entire companies, providing financial advice, and opining on the fairness of specific transactions 

Investment grade—fixed income security rated BBB or higher 

Junk bond - fixed-income security rated below investment grade 

Leveraged buyout (LBO)—acquisition of a business by an investor group relying heavily on debt financing 

Liability—a debt or other obligation to pay 

Liquidating distribution—cash or securities distributed to shareholders by a company in the process of liquidation 

Liquidating trust—an entity established to complete a corporate liquidation 

Liquidation value—the expected proceeds if the assets of a company were sold off, but not as part of an ongoing enterprise 

Liquidity—having ample cash on hand 

Liquid security—a security that trades frequently and within a narrow spread between the bid and asked prices 

Making a market—acting as a securities dealer by simultaneously bidding for and offering a security 

Margin of safety—investing at considerable discounts from underlying value, an individual provides himself or herself room for imprecision, bad luck, or analytical error (i.e., a “margin of safety”) while avoiding sizable losses 

Market price—the price of the most recent transaction in a company’s publicly traded stock or bonds 

Maturity—the date on which the face value of a debt security is due and payable 

Merchant banking—an activity whereby Wall Street firms commit their own capital while acting as principal in investment banking transactions 

Merger—a combination of two corporations into one 

Mutual fund—a pooled investment portfolio managed by professional investors 

Net asset value (NAV)—the per share value of a mutual fund calculated by dividing the total market value of assets by the number of shares outstanding 

Net-net working capital—net working capital less all long-term liabilities