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News - 7 June 2012

Financial Glossary: Part One A to B

As part of our attempt to demystify the complex world of financial jargon, here is Part One of the ABDS guide to current business terms.

AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of a borrower defaulting is minuscule.

Administration A rescue mechanism for UK companies in severe trouble. It allows them to continue as a going concern, under supervision, giving them the opportunity to try to work their way out of difficulty. A firm in administration cannot be wound up without permission from a court.

AGM An annual general meeting, which companies hold each year for shareholders to vote on important issues such as dividend payments and appointments to the company's board of directors. If an emergency decision is needed - for example in the case of a takeover - a company may also call an exceptional general meeting of shareholders or EGM.

Assets Things that provide income or some other value to their owner.

  • Fixed assets (also known as long-term assets) are things that have a useful life of more than one year, for example buildings and machinery; there are also intangible fixed assets, like the good reputation of a company or brand.
  • Current assets are the things that can easily be turned into cash and are expected to be sold or used up in the near future.

Austerity Economic policy aimed at reducing a government's deficit (or borrowing). Austerity can be achieved through increases in government revenues - primarily via tax rises - and/or a reduction in government spending or future spending commitments.

B

Bailout The financial rescue of a struggling borrower. A bailout can be achieved in various ways:

  • providing loans to a borrower that markets will no longer lend to
  • guaranteeing a borrower's debts
  • guaranteeing the value of a borrower's risky assets
  • providing help to absorb potential losses, such as in a bank recapitalisation

Bankruptcy A legal process in which the assets of a borrower who cannot repay its debts - which can be an individual, a company or a bank - are valued, and possibly sold off (liquidated), in order to repay debts.

Where the borrower's assets are insufficient to repay its debts, the debts have to be written off. This means the lenders must accept that some of their loans will never be repaid, and the borrower is freed of its debts. Bankruptcy varies greatly from one country to another, some countries have laws that are very friendly to borrowers, while others are much more friendly to lenders.

Base rate The key interest rate set by the Bank of England. It is the overnight interest rate that it charges to banks for lending to them. The base rate - and expectations about how the base rate will change in the future - directly affect the interest rates at which banks are willing to lend money in sterling.

Basel accords The Basel Accords refer to a set of agreements by the Basel Committee on Bank Supervision (BCBS), which provide recommendations on banking regulations. The purpose of the accords is to ensure that financial institutions have enough capital to meet obligations and absorb unexpected losses.

Basis point One hundred basis points make up a percentage point, so an interest rate cut of 25 basis points might take the rate, for example, from 3% to 2.75%.

BBA The British Bankers' Association is an organisation representing the major banks in the UK - including foreign banks with a major presence in London. It is responsible for the daily Libor interest rate which determines the rate at which banks lend to each other.

Bear market In a bear market, prices are falling and investors, fearing losses, tend to sell. This can create a self-sustaining downward spiral.

Bill A debt security- or more simply an IOU. It is very similar to a bond, but has a maturity of less than one year when first issued.

BIS The Bank for International Settlements is an international association of central banks based in Basel, Switzerland. Crucially, it agrees international standards for the capital adequacy of banks - that is, the minimum buffer banks must have to withstand any losses. In response to the financial crisis, the BIS has agreed a much stricter set of rules. As these are the third such set of regulations, they are known as "Basel III".

Bond A debt security, or more simply, an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. They can be issued by companies, banks or governments to raise money. Banks and investors buy and trade bonds.

BRIC An acronym used to describe the fast-growing economies of Brazil, Russia, India and China.

Bull market A bull market is one in which prices are generally rising and investor confidence is high.

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 Financial Glossary part 2 C to D

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