A Glossary of Loan Terminologies

 

GLOSSARY OF LOAN TERMS

Amortization

The process of writing off or liquidating an asset or loan periodically on an installment basis.

Accrued liabilities

Liabilities that represent obligation for certain services for which payments are yet to be made and are indirect sources of financing.

Annuity

A series of receipts or payments of a fixed amount for a specified number of years. Alternatively, a pattern of cash flows that are equal in each year, that is, equal annual cash flow.

Arbitrage

Act of buying an asset/security in one market and selling simultaneously in another. This restores equilibrium in markets that are temporarily out of equilibrium.

Assets

Valuable resources owned by a business, which were acquired at a measurable money cost.

Bad debt

Debts that are not collectible and therefore, proves to be of no worth to the creditor.

Balance Sheet

A statement of assets and liabilities at a specified date.

Bonds

Long-term debt instruments.

Bonus Share

Dividend paid in form of equity share and not in cash.

Bridge Loan

Refers to short-term loan to fund temporary needs as long as permanent financing is not available.

Business Plan

A plan that illustrates the current business strata of an organization and its future plans towards the achievement of its organizational objectives.

Capital

Money put into the business transactions.

Capital Asset Pricing Model (CAPM)

It explains the behavior of security prices and provides a mechanism whereby investors

could assess the impact of a proposed security investment on the overall portfolio risk and return.

Capitalization Rate

A rate of interest (discount) employed to calculate the present value of future cash flows. This is the rate that investors expect.

Capital Market

The channel through which savings become available for industrial investment.

Cash Flows

The actual receipts and payments by a firm.

Collateral

Assets that are offered as a security for the repayment of a loan or other credit.

Collection Period

It is the average period taken to collect receivables. It is equal to the number of days in a year divided by debtors' turnover (total credit sales/average debtors).

Common-size Statement

Balance sheet or income statement in which items are expressed in percentage rather than in home currency.

Conventional Cash Flow Pattern

A pattern of cash flows in which an initial outlay is followed by a series of cash inflows.

Coupon Rate

It is the stated rate of interest on a bond or debenture.

Covenant

A binding agreement promising to do or not to do a particular thing.

Credit Analysis

The process of determining whether an applicant satisfies the credit standards of a firm and the amount of credit that should be extended to him.

Credit Standards

The minimum criterion for the extension of a credit to a customer.

Current Assets

Assets that can be converted in the ordinary course of business into cash within a year, length, or operating cycle, which is higher.

Current Liabilities

Liabilities, which are intended to be paid within a year, in the ordinary course of business from the date of inception.

Current Ratio

A measure of liquidity, it is the ratio of current assets and current liabilities.

Coverage Ratios

Ratios that measure the ability of a firm to meet its fixed obligations.

Debt

An amount of money borrowed or owed by one party to another. Example, loans, commercial paper, and bonds.

Debt-Equity Ratio

The ratio of debt to equity. It is a measure of long-term financial position of a firm.

Debt Service Coverage Ratio

Ratio of total cash operating funds available to service debt obligations.

Default Risk

Uncertainty of expected returns from a security attributable to possible changes in the financial capacity of the issuer to make future payments to the security owner.

Delinquent

A situation where one fails to make payment, which can lead to foreclosure.

Endowment

It is a fund containing assets whose use is restricted only to the income earned by these assets.

Equity Funds

Long-term funds provided by the owner of a firm and consist of ordinary share capital and retained earnings.

Factoring

It is an agreement in which receivables arising out of a sale of goods/services are sold by a firm (client) to the factor (a financial intermediary) because of which title to the goods/services represented by the said receivables passes on to the factor.

Financial Lease

It involves a relatively long-term commitment on the part of the lessee.

Float

The amount of money tied up in cheques that have been drawn but have not been collected.

Floatation Costs

Costs incurred in issuing securities. For e.g. underwriting & brokerage costs, printing, legal, publicity, etc.

Guaranteed Loan

In this case, a third party guarantees the payment of a loan if the borrower fails to perform.

Hedging Approach

Financing the short-term requirements of funds by short-term and long-term requirements by long-term funds.

Inter-Corporate Deposits

These are short-term deposits with other corporate firms.

Internal Rate of Return

The rate of return that equates the present value of future cash flows to the initial investment on the project.

Leveraged Lease

A lease arrangement, which involves a third party, which is a lender in addition to the lessor and lessee (also referred to as third-party lease).

Limited Liability

The shareholders' liability limited to the amount invested in the business.

Line of Credit

A bank agreement stating a company may borrow at any time up to the specified limit.

Loan Agreement

A written contract between a lender and a borrower, stating the rights and obligations of both the parties in regards to a specified loan.

Loss Reserves

Reserves set out by the board of directors of a company to meet unanticipated future loan losses. These reserves are not used for lending purposes.

Market Value

It is determined on the basis of the stock market quotation of the company's securities.

Net Working Capital/Net Worth

The excess of current assets over current liabilities.

Negotiable Certificates of Deposits

It is a marketable receipt of funds deposited in a bank for a fixed period.

Off-Balance Sheet Financing

Hidden form of debt without being shown as a liability.

Opportunity Cost

The return that would have been obtained from an alternative investment.

Option

It provides its holder with an opportunity to purchase or sell a specified number of shares at a stated price or on before a specified period.

Pac-mans

A form of tender offer under which the firm under attack becomes the attacker.

Portfolio

A group of assets or investments held by an investor, Investment Company or a financial institution. For example, bonds, stocks, mutual funds, etc.

Principal

An amount of money upon which interest is calculated.

Promissory Note

A written agreement sent by the borrower to the lender promising him to repay a specified sum of money at a stated time.

Receivables

Money owed to a business by customers who have bought goods or services on ordinary extension of credit.

Recourse

The right to demand payment from the guarantor of a commercial paper when the borrower fails to pay.

Restructure

Making changes in the original agreement with the consent of the parties involved.

Roll Over

A situation where parties to the contract agree to carry over the loan for another stated period at the time of maturity.

Safety Stock

The minimum level of inventory that provides a cushion against the possibility of being out-of-stock because of change in demand.

Security

Any thing offered or given to fulfill the performance of a contract. For example, real estate, stocks, fixed assets, jewelry, etc.

Stretching Accounts Payable

Strategy of paying bills as late as possible so long as the firm's rating is not damaged, taking into account any cash discount offered.

Term

The tenure of the policy.

Treasury Bills

These are bearer obligation of the government.

Value of the Firm

Market value of a firm's debt and equity.

Warrant

An option that gives right to its holder to purchase a specified number of equity shares at a pre-decided price over a certain period.

Working capital

Current Assets plus Current Liabilities.

White Knight

A company that comes to the rescue of a firm that is being targeted for a takeover.

Write off

To consider as a loss or failure in case of uncollectible investments.

Yield

The actual return received by an investor.

Zero Coupon Bond

The bond that does not pay any interest. It is issued at a price lower than its maturity values.

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