Dictionary

A

- B

- C

- D

- E

- F

- G

- H

- I

- J

- K

- L

- M

- N

- O

- P

- Q

- R

- S

- T

- U

- V

- W

- X

- Y

- Z

Aliquot interest return

Bonds are normally bought one period before the first coupon payment. This results in two problems. This affects the discount period in the case of each cashflow and this represents a daily "accrual" of interest for the bondholder. The buyer of a bond pays the agreed price of the bond plus the accrued interest or the aliquot interest return.

Allocation effectiveness

Financial markets should operate in such a way as to allocate savings to the most productive companies, i.e. so that they are allocated effectively. Such opportunities are attractive for individual investors, as they lead to maximum profit at minimum risk. If the managers of a financial institution invest creditors funds into companies with a low yield or a high rate of risk, then investors re-invest their funds or increase the price that they demand for the funds (i.e. increase the interest rates) or limit the investments made by the financial institutions into certain companies on their behalf.

American depositary receipts

American depositary receipts (ADR) are part of the GDR group. They are traded only on stock exchanges in the US. ADRs were the first to originate, with the term GDR being used when the receipts began to be traded outside the US. Their popularity among US investors is based on the fact that trading with ADRs is conducted in the same manner as trading with US shares. Trade settlement is also conducted pursuant to US regulations.

Annuity

The term annuity is used in finance theory to refer to any terminating stream of fixed payments over a specified period of time.

Examples of annuities are regular deposits to a savings account, monthly home mortgage payments and monthly insurance payments. Annuities are classified by payment dates. The payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other interval of time.

Arbitrage

Market equilibrium is attained when identical securities, i.e. securities with the same risk/return profile, are being sold at the same price (the one price law). If two such securities are being sold at two differing prices (e.g. CZK 1100 and CZK 1120), then it can be expected that there will be demand for the cheaper security. The increase in demand will lead to an increase in its price, until the time when equilibrium is attained. The process by which equilibrium is attained is called arbitrage. If there are any arbitrage opportunities available, then prices are not in equilibrium. Arbitrage profit ceases to exist when the transaction costs associated with the purchase of the cheaper security and the sale of a the more expensive security exceed the difference in the prices of both securities (i.e. CZK 1120 – CZK 1100). Transaction costs result in the imprecise application of the one price law. The lower transaction costs are, the more effective the market mechanism will be.

Bills of exchange

According to legal theory, a bill of exchange is defined as a security fulfilling requirements exactly defined by law, in particular an unconditional obligation or order of the issuer to pay a determined financial amount at a certain time, at a certain place, and ensuring its lawful holder the right to require this fulfilment from the person who signed the bill of exchange.

Bills of lading

Under the terms of a freight transportation contract, the carrier may be obliged to issue the sender a bill of lading upon accepting the consignment. A bill of lading is a document evidencing the right to demand that the carrier issue the consignment in accordance with the provisions of this document.

Bond

A bond is a security connected with the holder’s right to demand the payment of a due amount in the nominal value and the payout of returns ensuing from it as at a certain date.

Bond at a discount

Is sold for a price lower than its nominal value.

Bond at a premium

Is sold for a price higher than its nominal value.

Call option

The right to buy and accept a share – an option is a security, which represents the right of its holder either to exercise or not exercise a transaction at a certain date. In the case of a call option this means the right to buy or accept a share. The counterparty is obliged to realise the trade should the other party wish it.

Capital adequacy

Characterises the risk of a bank having inadequate capital reserves in view of the risks it is undergoing. Current ČNB (Czech National Bank) and BIS regulations define capital adequacy as the ratio between capital and risk-weighted assets.

Capitalisation

When capitalising, i.e. when a company uses its own funds to increase its registered capital, new shares are created, without the company gaining new funds. During the course of this procedure shares are created by the transformation of past years’ retained profit. Essentially, this is merely an accounting procedure. The retained profit account in the balance sheet is reduced by the nominal value of the issued shares while the company’s registered capital account is increased by the same amount. Subsequently, the company divides these additional shares among its shareholders in proportion to the number of shares held by each shareholder.

Capital markets

Capital markets represent markets with shares, and markets with credits and loans whose original maturity is greater than one year. Money market financial instruments are usually more liquid than capital market financial instruments.

Collection

By entering the order of “collection”, the owner of the account (the payer) gives the bank the account numbers of those entities which he/she permits, by collection, to debit his/her account. With SIPO and Český Telecom collections, the client doesn’t need to notify these entities about entering an order for the collection.

Collection payment

see collection

Commodity markets

Commodity markets are classified as financial markets only in the case of the precious metals (gold, silver and platinum) market. Gold is sometimes considered to be currency. In that case it falls under the category of currency markets.

Construction savings

Saving in a building society is a form of saving where a client deposits money to an account at a building society, for which interest is added annually (usually in the amount of 3%) together with a state subsidy. After 24 months and after fulfilling further conditions determined by the building society, the client has a claim to a credit (usually for 6%). The difference between the interest rate from the credit and the interest rate from the deposit can amount to no more than 3%. A credit can be provided by the building society and used by the participant only to finance his housing needs. The building society can provide credits to the participant which serve to cover the costs connected with his housing needs even in cases where the participant does not yet have a claim to receive the credit, and the building society can provide credit only up to the target amount.

Coupon bond

Coupon bonds are debt instruments normally having a longer maturity period than is the case with zero-coupon bonds. Ownership of these bonds entitles the owner to receive regular income during the period between the issue and the time at which the bond's nominal value is due. The regular payments are called coupons. As is the case with discounted bonds, the coupon bond's nominal value is repayable at maturity.

Coupons

A coupon may be issued as a bearer security in order to enable the right to a return on shares, interim certificates, bonds or participation certificates to be exercised. Coupons are generally paid on an annual or semi-annual basis.

Credit rating

The determination of the credit risk of long-term instruments of companies (i.e. of debentures, credits and loans) is a complex process. It is not surprising that professional investors and investment counsellors try to find ways to simplify this problem. In the USA, where debt financing is a more important source of financing companies than, say, in the United Kingdom, there are a number of specialised companies which deal in ratings of individual debt instruments. The most popular are Moody’s, Standard and Poor, and Fitch and Co. Ratings are assigned to the country, companies and certain debt issues. Companies are rated according to their size, relative volume of debt to financing of its activity, and the share in the profit determined to finance the debt. Also considered are factors of a qualitative character. With different companies these indices are included with different weighting, which can result in various ratings.

Currency (foreign-exchange) markets

This refers to debt, share or commodity markets, with the instruments being denominated in foreign currency, as well as a money market in various currencies (i.e. purchase of funds in one currency with funds in another currency).

Debt markets

Debt markets are markets with credits and loans and markets with debt securities. These instruments have a limited maturity (with the exception of bonds with infinite maturity, so-called perpetuities).

Derivatives

Derivatives are the common name for fixed term contracts and optional term contracts. The market value of such a fixed or optional derivative contract is derived from the market value of the underlying asset (instrument). The asset may, for example, be a physical commodity, a security, including government bonds, and a share index or a currency.

Direct trading

As a part of this manner of trading in the exchange business system, operations among members of the stock exchange are registered where the amount of securities is at least CZK 200,000. The price and amount of the handled security is determined in advance by an agreement of both contractual participants in direct trading. Thus in these operations the transaction price is not created on the basis of comparison of an anonymous offer and demand, because both participants of the transaction know each other in advance. The price for which a direct transaction is concluded is not the stock-market rate, and its variance with the valid rate is in no way restricted.

Diversification

The process of diversification may be used to reduce certain risks. Investors may decide to invest their funds into a large number of companies instead of one company. Also, in the case of a small volume of funds, they may invest into an investment fund or a mutual fund, which itself has a significantly diversified portfolio. A bank is another such institution, which arranges for diversification. A financial system allows for portfolios to be diversified in many ways. However, not all types of risks may be diversified. Company profits depend on the management’s ability and the overall economic and legal state of the economy. The general level of economic activity changes according to the business cycle. To a certain degree corporate profits are dependent on each other, and diversification cannot decrease this risk. This risk can be limited to a certain degree by expanding the investment scope to include foreign financial markets. But even here a certain degree of interdependency is apparent between individual countries’ business cycles. Countries with a limited number of manufacturing sectors may be strongly influenced by the collapse of a certain commodity market. In an extreme case the collapse of an important financial segment could result in the collapse of that country’s financial system (so-called systematic risk), which could have a serious impact on economic activity and international trade.

Dividend return

This quantity is calculated by dividing the gross dividend (net dividend plus tax) by the company’s market capitalisation (market capitalisation is equal to the number of shares multiplied by their momentary market price). This return may be used to compare with other interest rates. The use of the dividend return is limited, as it does not take into account future changes in the dividend.

Duration

Duration is the weighted average of the present values of cashflows (coupons and the principal values), where the weighing factor is the period between the present time and the date of the individual cashflows.

Earnings per share

Earnings per share – calculated as earnings divided by the number of shares. It has more relevance for the shareholder as an estimate of possible dividends.

Effective portfolio

An effective portfolio is every such portfolio having a lower risk than all other portfolios with a comparable (identical) expected return.

Eurodollar

Eurodollars are deposited in the accounts of banks (i.e. dollar claims and deposits), which are non-residential banks from the viewpoint of the US. The result is that a eurodollar is not subject to supervision and regulation in the countries where it is traded. A eurodollar is also not directly dependent on US interest rates, even though, to a certain extent, it is connected to the US banking system and is managed within banks in the same manner as all other currencies. For a transaction to be designated as a eurodollar transaction, the residency of the mediator is the decisive factor, rather than the residency of the primary creditor or of the final debtor. For example, a US citizen lends funds to a bank in London, which in turn lends these funds to the US: this transaction is a eurodollar operation. On the other hand, if funds go via a US bank in New York, this means that we are dealing with a domestic dollar operation. The affect of eurodollar transactions on the banking system is specified below.

Euromarket

A euromarket is a market on which securities and debts are traded, which are denominated in euro currencies. Euro currency markets, of which the eurodollar market is the biggest, were established at the end of the Second World War, when the currencies became convertible and when securities began to be truly traded on an international scale. The preposition “euro” appeared almost accidentally and is rather confusing, as it has no connection to Europe. A market with euro-securities exists in all major financial centres, with London having the biggest share of this trading activity.

Exchange rate risk

The risk of loss of profits as a result of changes in foreign exchange rates in relation to a currency in which accounts are kept.

Financial intermediation

Financial intermediaries (especially banks) were established in order to facilitate savings flows. The primary function of such a financial intermediation is the pairing of lenders with borrowers. Companies can borrow funds directly from the public via advertisements or may contact persons and other companies who they believe to have surplus funds. However, both these methods are expensive. Investors do not have sufficient knowledge of the market and the price for obtaining this information on an individual basis is high. Furthermore, companies do not need to borrow funds everyday, but merely when starting a new project or in order to finance existing projects.

Financial markets

Financial markets allow those with a financial deficit (companies, governments, local authorities or international organizations) access to cash for the purpose of financing their activities. Financial markets are classified into debt markets, share markets, commodity markets (of commodity markets only the precious metals market is included as part of financial markets) and currency markets (normally including the gold market).

Forwards

This represents the buyer’s commitment to buy a certain quantity of an underlying asset on a certain day for an agreed price (exercise price) and the seller’s commitment to sell the given quantity of the asset under the same conditions. The conditions of the contract are specified in detail within an agreement. Forward contracts are only traded on OTC (over-the-counter) markets, not on stock exchanges. The quantity, price and delivery date are thus set during the course of the agreement, with the contract being negotiated directly between the seller and the buyer.

Forward yield curve

This is based on the theory that the return for a certain time period is the same for various combinations of bonds having the same overall maturity period. Thus, the expected yield is identical regardless of the bonds into which the investor invests. In this way the forward yield curve represents the expected spot yield curve in the future.

Fundamental analysis

Fundamental analysis monitors the extent to which the price of shares corresponds to their actual (intrinsic) value. It attempts to provide answers to the question of which shares are overvalued and which are undervalued, i.e. which shares to buy or sell. It makes use of an exact arithmetic method of assessing the company’s financial indicators. It studies the company’s performance in the past on the basis of the company’s activities as a whole.

Futures

A futures contract is the only important derivative contract, and has a series of characteristics identical to those of the forward contract. Futures, like forwards, represent the buyer’s commitment to buy a certain quantity of the underlying asset on a certain day in the future for an agreed price (exercise price) and the seller’s commitment to sell the given asset under the same conditions. However, unlike forwards, futures are only traded on stock exchanges (option and term exchanges), not on OTC markets. The contract conditions, including the standardisation of the asset, are specified in detail by the stock exchange on which the given contract is traded.

Global depositary receipts

Global depositary receipts are instruments used on capital markets. The essence of this instrument is simple. Part of a domestic issuer’s ordinary shares are purchased via a manager by a foreign bank (a so-called depositary bank), to which the ownership rights associated with the ownership of the original shares pass. This may be a new share issue or shares from the secondary market. The foreign bank then issues a corresponding number of GDR in respect of these shares, with the number of receipts issued in respect of one share being determined in advance.

Hedging

Directly securing against risk, founded on the pairing of different flows – the aim being to attain a state where the flows on the asset side match the flows on the liability side.

Hold

A strategy applied in securities trading – indicates the strategy of holding a security.

Information effectiveness

Information effectiveness depends on the degree to which the market price reflects all the available relevant information. If a financial instrument is undervalued in view of the given public information momentarily available, investors try to buy the security, expecting that the price will increase to the equilibrium price. The driving force of information effectiveness is the competition that exists among investors, who try to maximise their profits.

Insurance

The purpose of insurance is to protect the client from a financial loss resulting from a certain event. One manner of classifying insurance is the type of insurance event, e.g. personal accident, fire, or theft. The type of insurance has an impact on the insurance c ompany’s risk and cashflow. On the contrary, long-term insurance encompases contributions spanning many years. Insurance is generally based on the aggregation of independent insurance events.

Interim certificates

If the subscriber has failed to repay the whole rate of issue of the subscribed stock before the company is entered in the Companies Register (the so-called outstanding share), after it is entered into the Register the company issues an interim certificate to the subscriber, which will replace all the shares of one type subscribed by him and not paid.

Investment coupon

An investment coupon is a registered security, which entitles its holder to buy shares intended for sale in exchange for the investment coupons.

ISIN

Issues of publicly tradable securities are designated with the ISIN code (International Securities Identification Number). This international system is regulated by the ISO-6166 standard. ISIN is a twelve-digit alphanumeric code, where the first two characters represent the abbreviation of the issuer’s country of origin (CZ – Czech Republic). This abbreviation is contained in ISO 3166. The next nine digits represent the basic number, with the last number representing the control number. In the Czech Republic use is made of only the last six digits of the basic number, i.e. the first three numbers of the basic number are zeros. Issues are classified by the basic number into circuits according to the business activities performed by the company.

KOBOS

KOBOS (Continual Exchange Trading System) is founded on the principle of the continuous conclusion of transactions in connection to the immediate supply and demand for securities. Trade in KOBOS is concluded on the basis of comparing and pairing orders, which are entered by the trader directly into KOBOS in real time (generally speaking, stock exchange trades are made in real time with a time priority). Trading in KOBOS ties in with trading at a fixed price as part of the harmonogram of the stock exchange day. The reason for this is the fact that the opening price in KOBOS is equal to the price reached during trading at a fixed price (fixing). When concluding these transactions use is made of the principle of price, followed by time priority, whereby the price, and within a set of identical prices, the time when the order was placed, is the decisive factor when pairing (satisfying orders).

LIBID

Report on interbank activity and on the euro currency activity is normally related to LIBOR and LIBID. LIBID - London Interbank Bid Rate.

LIBOR

LIBOR - London Interbank Offer Rate. LIBOR is the arithemic average of the interest rates on deposits in excess of GBP 10 million for a certain period, offered at 11:00 a.m. by London’s reference banks (usually National Westmister, Bank of Tokyo, Deutsche Bank, Banque Nationale de Paris and Morgan Guaranty Trust) to London clearing banks. Big banks pay slightly less than LIBOR for the funds they borrow and then lend these funds to smaller banks at a profit. Small banks lend funds to companies, which pay a certain premium over LIBOR. The widely accepted LIBOR is advantageous, because perhaps all interest rates of short and medium-term credits and loans on the na euro currency market are set on the basis of LIBOR. Interest rates for maturities of one day (overnight) through to one year for all the main euro currencies are published in the Financial Times on a daily basis.

Maturity

The time when securities are due.

Money markets

Money markets are part of debt markets, in that these markets are markets with credit and loans having an original maturity of up to one year, and markets with debt securities (bonds and bills).

Operational effectiveness

A condition of the aliquot effectiveness of primary markets is the operational effectiveness of secondary markets. A market is said to be operationally effective if only a small difference eyxists between the return on the sale of securities and the costs of buying the security, i.e. if transaction costs are low. This difference, which is called the spread in the case of market makers, is the profit earned by financial intermediaries. At any given moment a market maker quotes the price at which he is willing to buy a financial instrument (bid price) and the price at which he is willing to sell the same financial instrument (asked price). The spread represents the difference between these two prices.

Optimal portfolio

An optimal portfolio is a portfolio that gives the greatest ratio of additional return (= expected return - interest) to risk. We can combine this portfolio in an arbitrary ratio with a risk-free investment and we will always attain the same ratio of additional return to risk.

Options

Options, unlike forwards, futures and swaps, give their owner the right, rather than the obligation, to buy or sell a certain asset by a certain date or over a certain period of time in the future at an agreed price (exercise price, strike price), with the seller of the option being obliged to sell or buy the given asset under the same conditions. The conditions of the contract are specified in detail within an agreement. Options are traded on OTC (over-the-counter) market as well as on stock exchanges. An option may be divided into options for spot assets (the owner of the option has the right to buy or sell the given asset) according to the type of underlying asset or futures options (the owner of the option has the right to buy or sell the given asset via futures).

Participation certificates

Participation certificate is a security that gives the unit holder the right to a corresponding share of the assets in the mutual fund and the right to share in the return on this asset.

Perfect markets

The theory of financial markets is based on the assumption of perfect financial markets. In this abstract world the following assumptions apply: no taxes, no credit risk, no callable securities, no transaction costs, unlimited short selling is possible. In reality markets are not perfect. Despite this, the notion of perfect markets is a good starting point when studying financial markets.

Permanent debenture

A permanent debenture pays the coupons for an unlimited period of time and its price equals the sum total of the present values of discounted debentures by way of yield until the due date.

Pool

A pool is a term used to designate a joint fund of cash funds not differentiated in any way.

Portfolio mean yield

The portfolio mean yield, or also the expected portfolio yield is a weighted average of expected yields of the individual component parts of the portfolio.

PRIBID

One of the main indicators of loan markets in important financial centres is the reference interest rate, for which banks are willing to purchase (to borrow) deposits. For the Prague financial centre this rate is called PRIBID (Prague Interbank Bid Rate). They are determined from quotations of the reference bank in the market of interbank deposits including the algorithm for determining PRIBID and PRIBOR.

PRIBOR

One of the main indicators of loan markets in important financial centres is the reference interest rate, for which banks are willing to sell (to lend) deposits. For the Prague financial centre this rate is called PRIBOR (Prague Interbank Offered Rate). They are determined from quotations of the reference bank in the market of interbank deposits including the algorithm for determining PRIBID and PRIBOR.

Price/earning ratio (P/E)

The price/earning ratio (P/E) expresses the proportion of the market price of a share and of yield per share. It expresses how much investors are willing to pay for the yields at the respective public limited company.

Primary markets

The primary market deals with the issues of new securities and their repayment. The creation of a new receivable means a transfer of cash from the investor to the borrower. A receivable is liquidated in such a way that the debtor repays cash (interest, principal) to the investor. This is not a secondary market, because in this special market the issuer offers something that does not zet exist and that arises only on condition that the issued security finds its first acquirer. Thus the issuer fully controls the operations in the primary market. When issuing a security, the issuer can often also influence who will become and who on the contrary cannot become its first acquirer.

Profit yield

Profit yieldis calculated as a share in the profit after taxation and market capitalisation of the enterprise. Applicability of the profit yield is limited in the same way as it is with the dividend yield. Two companies may differ in the dates of their financial statements and the profits may relate to different periods. What is often published is the reciprocal value of profit yield designated as a P/E ratio, i.e. a ratio of momentary market price of a share of the enterprise to the profit of the enterprise per one share.

PSE

Put option

The right to sell, to supply a share – the option is a security, which expresses the right of its holder to implement or not to implement a transaction at a certain date. Thus in the case of a put option it means to sell or to supply somebody with a share. The counterparty is obliged to implement the transaction if so desired by the other party.

PX - 50

Prague Stock Exchange publishes 22 indices. The key index is the PX 50. It is determined by way of a standard calculation in agreement with the methodology of IFC (International Finance Corporation). The index measures the change in the market value of the representative portfolio of stock included into the base of the index. Each issue is due the weight proportionate to its market capitalisation. The base of the PX-50 index is composed of 50 issues. The base of the index does not include the issues of investment funds, because their rates reflect the price movements of basic issues. The issues included into the base of the index account for almost 88% of the volume of transactions with shares (not considering the investment funds).

Reinsurance

Very suitable for reinsurance are derivatives. These contracts make it possible to reinsure, by way of these contracts, a position in assets or liabilities of the balance sheet or sub-ledger. By fixing the price they reinsure against a possible unfavourable development of prices. For example we plan that in a few months we will need a certain amount of USD. The present rate in the market of futures can be considered as advantageous, so we would like to purchase USD for this rate in a few months. Therefore we purchase futures for American dollars now. The purchase is conditioned by making a certain deposit (security). In some time, before we sell this term contract, we may be asked to send further means to our deposit account. This will happen if the USD weakens against the currency for which we are to buy the USD in future. If, on the other hand, the USD becomes stronger, then on the contrary we can even draw from the deposit account, because its balance increases. In several months after the purchase of the contract of futures we purchase dollars on the spot market and at the same time sell the contract of futures. If, against our original expectations, the USD has weakened, then the loss in the market of futures will be compensated by the profit from the purchase of USD in the spot market (we will purchase USD in the spot market more cheaply than the price of futures at the time of the purchase of futures). If, on the contrary, the USD has strengthened, then the profit in the market of futures will be compensated by the loss from the purchase of USD in the spot market (we will purchase USD in the spot market at a higher price than the price of futures at the time of the purchase of futures). After all, the term transaction arose exactly because of the need to cover positions.

Retail banking

Retail banking is understood to mean the provision of services to the general public, i.e. the provision of credit repayable in instalments, mortgage loans, depositary services, etc. In comparison to wholesale banking retail banking encompasses a large spectrum of activities at many branches. Certain services offered by retail banking (e.g. credit cards) are highly profitable.

Risk

Financial institutions and markets exist in a world of insecurity. A type of insecurity is the risk. There are several types of risk. Obviously the most important risk of financial markets is the credit risk, which means a risk of loss if the partner fails to honour his commitments according to the conditions of the contract. In the category of credit risk, the so-called settlement risk is sometimes specified, which is a risk of loss from a failure to settle a transaction. Another important risk is market risk, which is divided into interest, stock, commodity and rate risks. This is a risk of loss in the case of the small liquidity of markets (risk of market liquidity), or risk of momentary insolvency (risk of cashflow). Operational risk is a risk of risk in the case of human errors, fraud or imperfection of information systems. Legal risk is a risk of loss if a contract is not legally enforceable.

ROA

Return on assets: an index which describes valorisation of the total assets, i.e. how much a unit of assets yields to the bank for a given period of time. The ratio of after-tax net profit to average activities.

ROE

Return on equity: an index which says how much the capital of shareholders yields. The ratio of after-tax net profit to average funds of shareholders.

Secondary markets

A secondary market is a market of already issued securities. Transactions in the secondary market do not create or liquidate financial receivables for debtors. With a change in holder, cash does not move between investors and debtors, but between investors. The debtor is not affected by the transactions in the secondary market, while the creditor transfers the rights of repayment to other persons. The economic function of the secondary market with securities is a change in the structure of their holders. The issuer of a share often has no chance of preventing purchases or sales.

Securities

A security is understood to mean a tradeable (i.e. a transferrable) financial instrument, in the sense that the instrument may be bought and sold. It is the tradability characteristic that is important for the given instrument to be considered a security. This is because not all financial assets may be traded.

Securities issue

Upon the issue of a security, the issuer represents the supply side. The primary subscriber of a security represents the demand side. It generally applies that the issuer of a security is not able to determine clearly in advance the interest in the given issue. It is only an estimate. An issue is understood to be a collection of mutually substitutable securities issued by a certain issuer based on its decision. In this decision the issuer primarily determines the type of security (e.g. share, bond, participation certificate), nominal value and the number.

Segmentation theory

It does not use the concept of a forward interest rate, but it distinguishes between the preferences of individual investors. Short-term and long-term debentures are negotiated in different markets, a short-term and a long-term market, which are mutually exclusive, i.e. the long-term interest rate does not depend on the development of the short-term interest rate.

Share markets

Share markets are markets on which shares are traded, i.e. instruments having, in theory, infinite validity. Shares exist until such time as the relevant public limited company is closed by its liquidation, division or merger with another company.

Share risk

Share risk - risk on shares: the risk of a change (not neccesarily limited to a decrease) in the share price.

Shares

These are securities giving their holder (the shareholder) the right to share in the management of the company, its profit and any liquidation balance if the company is closed.

Short sale

Short sale means that the investor sells a security that he does not own. The intention is to sell a security at the momentary price in the expectation of repurchasing the security at some point in the future at a lower price. In order for an investor to realise a short sale, he borrows the security from another investor, who owns the given security. During the borrowing period the short seller must pay the lender of the security all the returns associated with the security (dividends, coupons, etc.). At the end of the short sale the short seller then buys the given security on the market and returns it to the lender. The short seller will make a profit (loss) if he buys the security for a lower (higher) price. A short sale is not subject to a time limitation. Collateral, which the lender accepts from the short seller, may represent a time limitation on a short position.

SIPO

see collection

Spot

A spot is a prompt transaction: purchase or sale of one currency for another for the current rate of exchange in the financial market at a given moment.

Spot yield curve

Dependence between the expected yield until the definite due date of the respective instrument, and the definite date is called spot yields curve. It is important that debentures are issued under the same conditions with the exception of the due date, so that the differences in yields are dependent only on that time, i.e. there must be the same risk of debentures, the same taxation, the same time of payment, etc.

Spread of portfolio yields

The calculation of the spread of portfolio yields is more complicated. It is wrong to assume that the spread of portfolio yields is a weighted average of the spreads of the individual component parts of a portfolio, i.e. the application of a similar approach as in the determination of the mean yield of a portfolio. One of the main principles of the present portfolio theory is that the risk of a portfolio is normally lower than the sum total of risks of the individual component parts.

Swap

Swap is an English expression for exchange: it designates a sale of one currency for another one with a repurchase after a certain period of time for a rate agreed in advance.

Technical analysis

The changes of prices of stock are determined by many factors and many of them cannot be anticipated. The estimation of the changes of prices of stock on the basis of economic factors is the basis of fundamental analysis. The estimation of the changes of stock on the basis of other factors is the subject of technical analysis, which is based only on the records of the results of previous operations in stock. All this is based on the hypothesis that the prices of stock reflect all the factors including psychological factors, which in short-term investments are more important than the factors included into fundamental analysis.

Theories of expectations

Theories of expectation are the most discussed theories on the temporal structure of interest rates. They consist of several similar theories. What all the theories of expectation have in common is that the investors do not differ in the possession of debentures with various due dates.

Theory of increasing premium for liquidity

According to the theory of increasing premium for liquidity, yields increase with increasing due dates. Investors who do not invest into debentures are averse to risk (i.e. they prefer low !!volatility!!130 of yields). The prices of long-term debentures have a higher volatility. With long-term debentures, investors require higher yields, by which they compensate the higher risk.

Theory of local expectation

The expected yield of debentures of all due dates during the following period is equal to the risk-free interest rate, i.e. to the yield of debentures with the shortest due date.

Theory of monetary substitute

According to the theory of monetary substitute, very short-term debentures represent close substitutes of cash. With regard to the risk, many investors limit themselves to purchases of short-term instruments of the money market. Therefore the prices of the instruments of the money market increase and the corresponding interest rates decrease in comparison with longer due dates. The theory assumes a large number of investors investing into short-term debentures. Thus as against the issuers, the buyers strongly prefer short-term due dates. This fact increases the prices of debentures and decreases the corresponding interest rates.

Theory of preferential behaviour

According to the theory of preferential behaviour, investors prefer the purchase of debentures of certain due dates, but not only short-term debentures, and when purchasing other debentures they require higher yields. This theory is practically a combination of the segmentation theory and of the theory of increasing premium for liquidity. Instead of the permanently preferred short-term due dates, with the theory of increasing premium for liquidity the investors may prefer other due dates depending on their individual investment goals.

Theory of unbiased expectation

Forward interest rates are determined by the market expectation of future interest rates, i.e. the forward interest rates are unbiased assessments of future spot interest rates.

Theory of yield curves

The dependence of interest rates (of the yield until the due date) on the due date of zero coupon bonds in the milieu of perfect financial markets is called a yield curve or temporal structure of interest rates. A yield curve can be upward-sloping, flat, downward-sloping. Most often it is upward-sloping. It means that the longer the due date, the higher the expected yield, and also the higher the !!volatility!!130 of the price of the debenture.

Traveller's cheques

A traveller’s cheque is a security, which entitles the person printed on it to receive the amounts stated therein upon its presentation for payment, subject to the conditions stipulated by the issuer of the cheque.

Uncertainty equivalent

Besides the use of utility function, risk aversion may also be analysed with the help of certainty equivalents, which are applied in the case of games of chance. The uncertainty equivalent of games of chance is defined as the monetary amount that makes the investor indifferent between certainty and a game of chance.

UNIVYC, a. s.

The settlement company UNIVYC, a. s. is a 100% subsidiary company of the PSE. It is responsible for the settlement of operations in stock, for keeping asset accounts of the members of the stock exchange and for keeping a record of securities negotiated in the stock exchange. Direct participants in the settlement of operations with securities in the stock exchange and outside of the stock exchange are at present all the members of the stock exchange, who are entitled to purchase and sell securities at the stock exchange. Direct participants in settlements are the mediating element between their clients and the settlement company.

Utility function

The utility function is the dependence between utility (i.e. a subjective value) and the final value from the investment. Under otherwise equal conditions, all rational investors prefer greater utility to lower utility. Their utility function is upward-sloping. With investors averse to risk, every further crown of yield represents a permanently decreasing utility. If the first crown of yield represents a unit of utility, the second crown of yield corresponds to a utility lower than the unit etc. - its utility function is concave. With investors neutral to risk, every additional crown of yield represents the same additional amount of utility, which the linear utility function corresponds to. With investors seeking risk, every additional crown of yield represents a steadily increasing additional amount of utility and the utility function is convex.

Volatility

Volatility means fickleness, instability, for example, of prices, rates, tariffs.

Warehouse certificates

A certificate of acceptance of an item for storage by a warehouse operator issued to a bailer may have the character of security, to which is connected the right to require that the stored item be handed over (warehouse certificate).

Wholesale banking

Wholesale banking is represented by services offered to enterprises, investment companies, investment funds, pension funds, government agencies and the like. It includes, for example, providing credits, services of the depository, leasing, etc.

Yield until due date

The yield until the due date is a constant interest rate of discounting cash flow for all due dates of cash flow composed from coupons and nominal value, by way of this discounting we obtain the price of the debenture. The price of the debenture and the yield are inversely proportional.

Zero-coupon bond

The issue of a zero-coupon bond commits the issuer to pay a nominal value at a certain date in the future. On the primary and secondary market it is sold for a price lower than its nominal price. The difference between the nominal value and the sales price is the so-called discount. A zero-coupon bond does not have coupon repayments between its issue and the repayments of the nominal value.