| Back-to-back loan | 1. Indirect lending
where funds are loaned through an intermediary, which enters into
separate, but symmetrical, agreements with a lender and a borrower
who are typically related parties. |
| 2. The term is also
sometimes used to describe the situation in which a loan by an
unrelated financial institution is guaranteed by a party related to
the borrower. However, the more common use occurs where collateral
of some kind is provided by the related party. |
| Base rate | The rate at which the
Bank of England lends to discount houses by buying their bills.
Sometimes referred to as the repo rate, the base rate is usually
the minimum rate at which banks are prepared to lend money. The
high street bank base rate follows that set by the Bank of England,
and it acts as the benchmark for other interest rates, including
mortgages and personal loans. |
| Basis point | A change of 0.01% (a
hundredth of a per cent) in an interest rate |
| Bill of exchange | An unconditional order
written and signed by one person (the drawer) and addressed to
another person (the drawee). The order instructs the drawee to pay
a specified sum of money to a specified person (the payee) to the
bearer, either on demand or at a specified future date. The drawee
must `accept' the bill (accept liability to pay the amount when the
bill matures) by signing the face of the bill. The bill then
becomes an `acceptance'. A bill of exchange is a negotiable
instrument: the payee can turn it to account immediately by selling
it, usually at a discount, to a bank or to some other person. A
cheque is a special form of bill of exchange, with a clearing bank
as the drawee. |
| Bond | A negotiable written
instrument evidencing a debt. Under the terms of the contract, the
issuer is obliged, among other things, to pay the holder a fixed
principal amount on a specified future date, and often to also make
periodic payments of interest. Bonds are usually issued by
companies, governments, or local authorities or other public
bodies. |
| Capital
contribution | A contribution, in cash
or in kind, leading to an increase in the equity capital of a
company and which does not generally constitute taxable income for
the company. |
| Capital
distribution | Distribution of funds
not derived from the profits of a company, being either a return of
the original subscribed capital or derived from a sale of capital
assets. |
| Capital redemption
reserve | S170 Companies Act 1985
provides that where shares of a company are redeemed or purchased
wholly out of the company’s profits, or by a fresh issue the
amount by which the company’s issued share capital is
diminished on cancellation of the shares shall be transferred to a
reserve called the ‘capital redemption reserve’. It
also provides that the reduction of the company’s share
capital shall be treated as if the capital redemption reserve were
paid up capital of the company. |
| Cash basis | Accounting method in
which only cash receipts and cash expenditure are used in computing
taxable income. |
| Check-the-box
regulations | Method used in the US
from 1997 to determine the classification of a domestic or foreign
business as a corporation, a partnership or a disregarded entity.
An unincorporated entity may elect, on IRS form 8832, for the
classification it wishes by ticking a box on a form. If no election
is made, default rules apply based upon the liability, and number
of, the members. |
| Conduit financing | Transaction involving
one or more intermediate, or conduit, companies, usually to reduce
withholding tax. See also Back-to-back loan and Treaty
shopping. |
| Convertible bond | Bond which gives the
holder the option of either receiving repayment of the principal at
maturity, or converting the debt into shares (either in the issuing
company, or some other company). Sometimes referred to as hybrid
capital. See also debt capital and equity capital. |
| Coupon stripping | Former exploitation of
the difference in the UK between the tax treatment of interest and
accruing discount, the latter being taxable on disposal or
redemption. Deep discount securities were backed by
interest-bearing securities held by the issuing company, the coupon
on the latter being matched by the accruing discount on the former;
eliminated by anti-avoidance legislation and loan relationships
legislation. Generally, separating an interest-bearing security
into separate components: the right to receive the principal
(called the principal strip) and the right to receive interest (a
series of coupon strips). The separate components are repackaged
and can be traded individually. US Treasury Bonds are widely traded
in stripped form. US bond strips are called STRIPS (Separately
Traded Principal and Interest Securities). The strip market in
Europe, including the UK, is less active, although there is a
market in gilt strips. |
| Coupon washing | Sale of a bond by a
resident to a non-resident immediately before the annual interest
is due. The non-resident sells the bond back to the resident at a
lower price and the 'tax saved' is divided between the two. |
| Debenture | A term applicable to
any certificate that an amount of money is owed by a specified
person. In the UK, it often refers to a loan secured on the assets
of the company; however, the term may be used interchangeably with
`bond'. For example, a document which creates or acknowledges debt
or an interest-bearing corporate or government bond not secured by
specific property. |
| Debt:equity ratio | The ratio of debt
capital to equity capital. |
| Debt capital | Funding through loans,
such as debentures and bonds. See also Equity capital and
Convertible bond. |
| Derivative financial
instrument | A financial instrument
whose value is dependent on, or derived from, the value of some
underlying asset. OECD definition: "A contractual right that
derives its value from the value of something else, such as debt
security, equity, commodity, or a specified index. The most common
types are forwards, futures, options and notional principal
contracts such as swaps, caps floors, and collars. Unlike
traditional debt and equity securities, these instruments generally
do not involve a return on initial investment." |
| Deep discount bond | A bond under which the
discount exceeds a certain proportion of the issue price. |
| Discount | i) The difference
between the value of a bond or other loan relationship at any time,
and its (higher) maturity or face value. Issuing a bond at a
discount is a way of rewarding the investor, either instead of or
as well as paying interest. See also market discount and issue
discount.
(ii) The difference between the spot price of a foreign
currency and the (lower) forward exchange rate.
(iii) The difference between the forward price of, or the
future in, any financial instrument or commodity and its (higher)
current value. |
| Double dipping | Tax relief in more than
one country because of differences in tax rules. See
Arbitrage. |
| Downstream loan | Loan from a parent
company to its subsidiary. |
| Equity capital | Ownership interest in a
company through share capital |
| Gearing | The ratio of the debt
in a company's balance sheet to its equity. This is occasionally
expressed as the ratio of the debt to the balance sheet total i.e.
the sum of the debt and equity. In an active sense, it sometimes
describes a situation in which the debt/equity ratio is
increased. |
| Gilt-edged bond, or
gilt | A gilt-edged security;
loan stock issued by the UK Treasury, and backed by the credit of
the UK. |
| Gross payment of
interest | Payment of UK source
yearly interest to an overseas recipient without deducting income
tax under the requirements of ICTA88/S349(2)(c). |
| Group finance
company | Wholly-owned group
subsidiary that borrows funds, from either inside or outside the
group, to lend on to affiliates. |
| Leveraging | An arrangement whereby
a small change at one end of a series of transactions creates a
disproportionately large change at the other. For examplea
leveraged player with capital of £1 million might buy an asset
costing £10 million, supplying bonds worth £9 million
through a stock loan. If the price of the asset rises by 10%, he or
she can realise a £1 million profit, as against someone who
has invested only £1 million and thus makes a £100,000
profit. Also another name, more common in America, for
`gearing'. |
| LIBID | The London inter-bank
bid rate. The rate of interest at which first-class banks in London
will bid for deposit funds. Often used as a benchmark for deposit
rates. LIBID is not fixed in the same way as LIBOR, but is
typically one-sixteenth to one-eighth of a per cent below
LIBOR. |
| LIBOR | London Inter Bank
Offered Rate. A benchmark interest rate fixed by the British
Bankers Association at 11 am each London business day. The fixing
is achieved by the BBA asking 16 banks for the rate at which that
bank could borrow in each of the range of currencies quoted in
London, for, say, 3 months, if it were to ask for and accept
inter-bank offers just before 11 am. The four highest and four
lowest quotations are discarded and the remaining 8 averaged to
give, in this case, 3-month LIBOR. 1-day, 1-week, 2-week, 1-month,
and 2- through 12-month LIBOR is fixed daily in the same way.
Rates for differing maturities are fixed in sterling,
dollars, euros and other major currencies. |
| Redeemable preference
shares | As preference shares,
with the issuer having the right to redeem them, so they have debt
characteristics. |
| Repo | A means of providing
short term finance against collateral. The `borrower' agrees to
sell securities (such as government bonds or shares) to the
`lender', with an agreement to buy them back (repurchase) at a
specified later date, either at an agreed higher price or at the
market price. The interest rate implied from this `lending'
transaction is called the repo rate. There is a statutory
definition of a repo in ICTA88/S730A(1). Effectively, this is a
secured loan, the price difference being the interest. The initial
purchaser typically makes substitute payments to the seller in
place of the interest or dividends formerly received on the
securities. |
| Revolving credit | A credit arrangement
allowing the borrower some flexibility as to the scale and timing
of a proposed borrowing or note issue. The borrower can usually
increase or reduce his indebtedness with some freedom during an
agreed period. |
| Scrip issue | See Stock
dividend. |
| Securities | Documents demonstrating
rights either to corporate share capital (e.g. share certificates)
or to government or corporate debt (e.g. bonds, debentures,
etc.) |
| Securitisation | The packaging of debt
or other receivables into the form of a tradable security. |
| Senior debt | Debt which is not
subordinated debt. |
| Stock dividend | Distribution of
dividends to shareholders in the form of additional shares in the
company, capitalised out of reserves instead of new share capital;
also called bonus issues or scrip issues. |
| Subordinated debt | Debt which is issued on
terms which stipulate that it will only be repaid once the claims
of more senior creditors have been satisfied. |
| Syndicated loan | A loan issued by a
group of lenders, usually banks or financial institutions. |
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