Investment Banking Terms

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Accretion/Dilution

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Analysis that determines the change in a company's projected EPS (Earnings Per Share) due to a potential M&A or capital markets transaction. A transaction is "Accretive" when there is a positive change in EPS and "Dilutive" when there is a negative change.

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Accrued Interest

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The interest earned on a loan or note between two interest payment dates.

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Agent

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The bank responsible for administering a project's financing.

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American Depository Receipt

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A certificate of ownership issued by a U.S. bank representing a claim on underlying foreign securities. ADRs may be traded in lieu of trading in the actual underlying shares.

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Amortization

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Writing off an intangible asset investment over the projected life of the assets. Also the spreading out of intangible costs over several years, such as amortization of stock option expense.

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Analyst

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Entry level position typically filled by graduates or lateral hires in a U.S. investment bank. Usually 2-3 years until promotion to Associate.

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Arbitrage

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Buying securities in one country/market and selling them in another. ("Trading risklessly for profit")

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Arrangement Fee

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A fee paid to a mandated bank or group of banks (lead arrangers) for arranging a transaction. It includes fees to be paid to participating banks.

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Arranger

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A bank or other financial institution responsible for originating and syndicating a loan transaction. The arranger always has a senior role, is often the agent, and usually participates in the transaction at the most senior level (it holds the largest share of the loan).

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Asset allocation

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The relative weightings of regions, sectors, and types of investments (i.e. equities, bonds, etc.) within a portfolio, determined by client risk and return requirements and the market outlook. This is central to financial planning and investment management.

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Asset class breakdown

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Percentage of holdings in different types of investments (i.e. large stocks, international, bond, etc.).

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Asset swap

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The bond's swapped spread, in basis points. The asset swap spread, or gross spread, is derived by valuing a bond's cash flows via the swap curve's implied zero rates. The gross spread is the basis point amount added to the swap curve, which causes a bond's computed value to equal the market price of the bond.

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Associate

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Position above an Analyst and below a Vice President. Typically filled by Analysts promoted after 2-3 years of experience, lateral hires, or MBA graduates.

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Audit

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Professional examination and verification of a company's accounting data.

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Balloon payment

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A final debt repayment that is substantially larger than the preceding repayments.

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Bank syndicate

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A group of banks that have been banded together to underwrite and sell a specific issue of securities.

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Base currency

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The first currency quoted in a currency pair on the Foreign Exchange.

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Basis point

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A unit that is equal to 1/100 of 1%, a basis point is used to denote the change in a financial instrument. Commonly used for calculating changes in interest rates, equity indexes, and the yield of a fixed-income security.

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Bear

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An investor who believes a market will fall.

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Bear market

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A market in which traders and investors are feeling negative and prices are falling or static.

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Beauty contest

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The informal term for the competitive process by which clients choose an investment bank to mandate for a deal.

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Benchmark index

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An index that correlates with a fund, used to measure a fund manager's performance.

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Best efforts

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Term used by banks in selling an entire new security issue by a certain date. They agree to make their best effort to sell an issue to the public. Instead of actually buying and reselling the issue (that would be called an underwrite), the banks leave the risk with the issuer by maintaining an option to buy and the authority to sell.

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Beta

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Mathematical measure of the sensitivity of rates of return on a portfolio or a given stock compared with rates of return on the market (a diversified portfolio) as a whole. A beta of 1.0 indicates that an asset closely follows the market; a beta greater (smaller) than 1.0 indicates greater (less) volatility than the market. Hence, beta is a measure of risk: the higher the beta, the higher the risk.

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Bill of Exchange

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A bill made out by one party addressed to another requiring the addressee to pay a fixed sum of money by a certain date. The bill is then traded on the money markets.

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Bid

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The price at which a market maker is willing to pay for a security.

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Bid Offer

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Bid Offer is the difference in price or spread between where one can buy a currency and one can sell it at the same moment.

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Big Figure

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The whole dollar price of a quote often used to reference foreign currencies. For example, if a foreign currency (EUR/USD) was trading at 1.5520, the big figure would be 1.55.

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Bloomberg

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Computer terminals providing real time quotes, news, and analytical tools, often used by traders and investment bankers.

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Bonds

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A long-term loan certificate issued by governments and organizations in order to raise capital. The capital is repaid with interest. A bond issued by a foreign institution is known as a bulldog in the UK, a yankee in the USA, a samurai bond in Japan and so on.

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Book runner

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The bank that extends invitations for syndication and is responsible for determining the composition of the lending group and the final hold positions.

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Book value

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The net-asset value of a company as determined by subtracting its liabilities from its assets.

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Brady bonds

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Bonds issued by developing countries under a debt-reduction plan.

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Bridge financing

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Interim or temporary financing.

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Broker

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Someone who earns commission for providing the link between buyers and sellers.

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Bulge bracket

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The largest and most prestigious firms on Wall Street.

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Bull

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An investor who believes the market will go up.

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Bull market

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A market in which traders and investors are feeling positive and in which prices are rising.

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Buy-side

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1. Investor end of a capital markets transaction. 2. M&A process when J.P. Morgan is working with a potential buyer.

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Calenderization

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Act of adjusting company financials to a December 31 year-end in order to standardize financial performance across companies with different fiscal years.

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Call option

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The right to buy shares at an agreed price at a future date (see put option).

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Capital

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Money put into a business by its shareholders.

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Capital Asset Pricing Model (CAPM)

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An economic model for valuing stocks by relating risk and expected return. Based on the idea that investors demand additional expected return (called the risk premium) if they are asked to accept additional risk.

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Capital expenditures

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Money spent to acquire or upgrade physical assets such as buildings and machinery. Also called capital spending or capital expense.

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Capital gain

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The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in profit if sold. Capital gain is often used to mean realized capital gain.

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Capital markets

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At J.P. Morgan, our capital markets teams are Equity Capital Markets and Debt Capital Markets. They are a part of our Corporate Finance business and are responsible for issuing new securities.

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Capitalization

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1. The sum of a corporation's long-term debt, stock, and retained earnings. 2. The market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share. Also called Market Cap or Market Capitalization.

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CEO

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Chief Executive Officer

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Certificate of Deposit

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A certificate given by a bank to depositor that can be traded on the money market. The depositor is able to get high levels of interest by putting their money in the bank for a fixed term but can sell the CD to someone else to get their capital back at short notice.

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CFA

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Chartered Financial Analyst qualification. This is the industry qualification for research Analysts on the buy side (markets) and Analysts and fund managers on the sell side (investment management and private banking).

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CFO

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Chief Financial Officer

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Chinese wall

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The physical and regulatory separation between the public and "inside" areas of a bank.

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Clearing

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The process of matching, guaranteeing, and registering transactions.

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Closing position

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A traders position at the end of the trading day. Equal to the Opening Position plus or minus any trades done on that trading day.

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Club

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A group of underwriters who do not need to proceed to syndication as part of fund-raising.

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Collateral

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Assets pledged as security under a loan to assure repayment of debt obligations.

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Collateralized Bond Obligation (CBO)

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Securities issued against a portfolio of bonds with different degrees of credit quality.

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Collateralized Loan Obligation (CLO)

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Securities issued against a portfolio of loans with different degrees of credit quality.

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Commercial Paper (CP)

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Short term debt obligations issued by corporations and bought by money market funds in large quantities. Maturities range from several days to 9 months.

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Commitment Fee

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A per annum fee applied to undisbursed balances that lenders are committed to lend. The fee is charged until the end of the availability period.

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Commodities

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Physical items such as oil, gold, or grain. Commodities are traded for spot (trade date plus two business days) and also for future delivery. There also exist options to buy and sell commodities.

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Common Stock

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Also called common equity, common stock represents an ownership interest in a company (as opposed to preferred stock). The vast majority of stock traded in the markets today is common, as common stock enables investors to vote on company matters. An individual with 51% or more of shares owned controls a company's decisions and can appoint anyone he/she wishes to the board of directors and/or to the management team.

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Compound Annual Growth Rate (CAGR)

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The year over year growth rate applied to an investment or other part of a company's activities over a multiple-year period. The formula for calculating CAGR is (Current Value/Base Value)^(1/# of years) - 1.