Chapter CFM1107
| Published date | 16 April 2016 |
| Record Number | CFM1107 |
| Court | HM Revenue & Customs |
Glossary
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| Acceptance credit | The use of bills of exchange* by a company as an alternative to short-term bank borrowing. The company draws a bill of exchange on an accepting house (a financial institution which guarantees payment of the bill on the *maturity date) and sells the bill to a bank for less than its face value. The accepting house pays the bank the face value of the bill on the maturity date; the company must fund the repayment. In effect, the company has borrowed money; the discount at which it sells the bill to the bank is equivalent to interest. |
| Accruals basis (accrual accounting) | Accounting basis that brings income and expenses into account in a period of account in which they are earned or incurred (even if not actually received or paid). |
| AFS | See available for sale. |
| American (or American-style) option | An option *which can be exercised on any business day until the *expiry date. See also European option, Bermudan option. |
| Amortised cost | A method of measuring a financial instrument by taking the amount at which an asset or liability is measured at initial recognition minus any repayments of principal, any reduction for impairment or uncollectability and plus or minus the cumulative amortisation of the difference between the initial amount and the maturity amount. The amortisation is calculated using the effective interest method. |
| Amortising swap | A swap whose underlying principal amount declines in stages through the life of the swap. |
| Arbitrage | Taking advantage of profitable opportunities in markets that arise from pricing anomalies. Risk-free arbitrage profits are possible if two instruments with identical characteristics are trading at different prices in different markets - the arbitrageur can simultaneously sell the higher-priced asset and buy the lower-priced asset. |
| ASB | Accounting Standards Board – the role of the ASB is to issue accounting standards having taken over this role from the Accounting Standards Committee (ASC) in 1990. |
| Asian option | An option where the amount received at settlement depends on the difference between the average price of the underlying *asset over a particular period and the *strike price. Also known as an average rate option. |
| Ask price | The price at which a trader or market maker is willing to sell. Also known as offer price. |
| Asset-backed security (ABS) | Tradable debt (normally issued by a company) backed by a pool of assets, such as stocks of finished goods or raw materials, trade debts, bonds, loans or mortgages. If the issuer defaults, the bondholders have first claim on the asset backing the bond. |
| Asset-linked security | Security whose value is linked to the value of an underlying asset, such as land or shares. |
| Asset swap | A swap that enables the investor to alter the characteristics of an investment, such as its interest rate characteristics or denominated currency. |
| Assign or assignment | A transfer of an asset or the right to receive payment from the original beneficiary (the assignor) to another (the assignee). This is different to novation. |
| Assignment (options) | A notice sent by the *clearing house *to the *writer *of an option telling him it has been exercised. |
| At-the-money (ATM) option | An option where the strike price *is at the current market level of the *underlying. See also in-the-money, *out-of-the-money *option. |
| Available for sale | IAS 39 categorises financial instruments into four types, which determine the presentation and measurement of the instruments in the accounts. All non-derivative financial assets that are not classified in another category are categorised as ‘available for sale’. |
| Average rate option | See Asian option. |
| Bad and doubtful debts | Debts proved or estimated to be wholly or party irrecoverable and either written off by the lender (in the case of a debt which is wholly bad) or written down in the lender’s books to their realisable value. See also Impaired Debts. |
| Basis point | One hundred basis points (bp) make up one percentage point, so 1 bp is equivalent to 0.01%. For example, an interest rate cut of 15 bp might take an interest rate from 3.15% to 3%. |
| Basis swap | An *interest rate swap *where two different types of *floating rate *interest are exchanged, for example, 6-month *LIBOR *for 3-month LIBOR. |
| BBA | British Bankers’ Association – the leading trade association for the UK banking and financial services sector. |
| Bearer security | A bond or other security issued in paper rather than electronic form. Title to the bond is evidenced by possession of the physical paper, rather than by the holder of the bond being registered. |
| Bear market | In a bear market prices are falling. A bear strategy is based on the belief that prices will fall. For example, investors will tend to sell if losses are anticipated. |
| Bermudan (or Bermudan-style) option | An option which can be exercised on any one of a range of dates. |
| Bid | An offer or undertaking to buy something at a specific price. |
| Bid price | The price at which a market maker or trader is willing to buy an instrument. The opposite of ask price, or offer price. |
| Bid-offer spread | The difference between the *bid price *and the *offer price *of a particular asset. |
| Bifurcation | The process of separating, in accordance with IAS 39, an embedded derivative from its host contract. |
| 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), 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. (See acceptance credit). A cheque is a special form of bill of exchange, with a clearing bank as the drawee. |
| Bill of lading | A foreign trade document used to describe the full details of the goods being sent. In the UK it is a negotiable instrument which gives the holder the right to possession of the goods. |
| Billion | In the financial world, used exclusively in the US sense of one thousand million (1,000,000,000) rather than one million million. Traders sometimes use the term yard (from the French ‘milliard’) to avoid confusion with ‘million’. |
| Black-Scholes model | The classic pricing model developed by Fischer Black and Myron Scholes in 1973 for the valuation of European-style options. |
| 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. Companies, governments and local authorities or other public bodies usually issue bonds. Banks and investors buy and trade bonds. |
| Bond stripping | 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 (Separate Trading of Registered Interest and Principal of Securities). The strip market in Europe, including the UK, is less active, although there is a market in gilt strips. |
| Broker | An individual or firm that acts on another’s behalf and, in return for a fee, brings potential buyers and sellers into contact with each other. |
| Broker-dealer | Someone who buys and sells securities on his or her own account and also acts as broker for clients. |
| Bull market | A market in which prices are generally rising and investor confidence is high. A bull strategy is based on the belief that prices will rise. |
| Bundesanleihen (Bund) future | Futures contract based on a notional German Government bond with a 4% coupon *and 8.5 to 10.5 year *maturity. |
| Buoni del Tesoro Poliennali (BTP) future | Futures contract based on notional Italian Government bond with a 6% coupon and 8 to 10.5 year maturity. |
| Callable | Of a bond, the issue terms are such that the issuer *has an *option to redeem the bond before the maturity date. |
| Call option | An option giving the holder the right, but not the obligation, to buy the underlying subject matter, at a pre-agreed price, on or before a specified future date. |
| Cap | An option product that limits the holder’s interest rate exposure but still allows the holder to profit from advantageous interest rate movements. |
| Capital instruments | Any instrument used by companies to raise finance, including shares, debentures and loans. |
| Capped floater | A *floating rate *note with a maximum (but no minimum) rate of interest. |
| Cash flow hedge | A hedge of the exposure to variability in cash flows that is attributable either to a particular risk associated with an asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable future transaction, and could affect profit or loss. |
| Cash settlement | The settlement between the parties to a derivative contract (or other financial product) of their mutual rights and obligations by means of payment of a cash sum by one party to the other, or the exchange of cash sums. |
| CBOT | Chicago Board of Trade. An exchange established in 1848 for trading financial, metal and commodity futures and options. |
| Central Gilts Office (CGO) | The computerised settlement system for *gilt *transactions originally operated by the Bank of England. In July 2000 the Bank |
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