Laymans guide to financial terms 2014 - University of Toronto

A Layman's Guide to Financial Terms

Jason Z. Wei University of Toronto Scarborough

wei@utsc.utoronto.ca Last update: April 2014 Copyright ? 2014. Any duplication in part or in whole for whatever purpose must be with the author's consent.

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Professor Jason Z. Wei, University of Toronto

Preface

This guide provides easy-to-understand definition and explanation of financial terms arranged in alphabetical order.

The idea of writing a guide like this was conceived when I first taught an introductory finance course at the University of Saskatchewan in 1992. While lecturing on certain topics, I would occasionally observe puzzled faces upon mentioning some basic financial terms. My informal investigations revealed that students either do not know the terms, or have heard of the terms but never really understand their precise meaning. For those who are first exposed to finance, the textbook doesn't always help, given the sequential nature of knowledge. Those observations motivated me to produce what is in front of you. Another, perhaps less academic reason for me to compile this layman's guide is my encounters with financially curious friends on social occasions. I would get such basic questions as "Exactly what is a derivative security?" Of course, a technical explanation will most likely confuse the inquirer, the end result of which may be increased consumption of alcohol due to frustration, not to mention the inquirer's silent lament that the taxpayers' dollar is completely wasted on this abstract, irrelevant, and self-indulging professor! A ready repertoire of easy-tounderstand financial terms, when put to use, may even enhance my popularity in the crowd, I figure.

I would like to thank all my students, previous and current, for their usage of the Guide. I especially thank those who have provided comments. Finally, I would like to express my appreciation to my colleague, Professor Melanie Cao at York University, who has shared the enthusiasm of such an endeavor and given detailed comments and inputs.

I strive to update this Guide on a regular basis. Your comments and suggestions are welcome!

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Professor Jason Z. Wei, University of Toronto

List of Terms Included in this Guide

144A Bond Accounts Payable Accounts Receivable Accrued Expenses Accrued Taxes Algorithmic Trading All Ordinaries American Depositary Receipt (ADR) American Option Amortization Amortization Schedule Amortized Loan Annuity Arbitrage / Arbitraging Asian Option Ask Price Asset-backed Securities (ABS) Asset Swap At-the-money Bank for International Settlements (BIS) Bank of Canada Bank Rate Bankers' Acceptances Basel Accords Basis Points Bear Spread Behavioral Finance Beta Bid Price Bid-ask Spread Black-Scholes Option Pricing Model/Formula Board of Directors Bond Bond Rating

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Professor Jason Z. Wei, University of Toronto

Bull Spread Bulldog Bond Butterfly Buyout CAC 40 Call Option Callable Bond Canada Mortgage and Housing Corporation (CMHC) Canada Pension Plan (CPP) Canada Pension Plan Investment Board (CPPIB) Canadian Deposit Insurance Corporation (CDIC) Capital Asset Pricing Model (CAPM) Capital Gain Capital Loss Capital Structure Cash Flow CDO (Collateralized Debt Obligation) CDS (Credit Default Swap) Central Bank Circuit Breaker Classified Board Clean Price Closed-end Fund Commercial Banking Commercial Paper Commodity Swap Common Shares Compound Interest Compounding Compounding Frequency Contingent Claims Continuous Compounding Convertible Bond Coupon Payments Credit Derivatives Credit Rating Crown Corporations CSI 300 Index

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Professor Jason Z. Wei, University of Toronto

Currency Appreciation Currency Depreciation Currency Devaluation Currency Option Currency Revaluation Currency Swap Current Assets Current Liabilities Current Ratio Current Yield Daily Compounding DAX Day Order Debenture Decimalization Default Depreciation Derivative Securities Dirty Price Discount Bond Discount Rate Discounted Payback Period Discounting Diversifiable Risk Diversification Dividend Dividend Reinvestment Plan (DRP or DRIP) Dividend Yield Dodd-Frank Act Dollar Cost Averaging Dotcom Bubble Dow Jones Industrial Average (Dow) Draft Duration Earnings per Share (EPS) EBIT EBITDA Effective Annual Rate (EAR)

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Professor Jason Z. Wei, University of Toronto

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