Important terms in finance

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Important terms in finance

Advances : It is synonymous with loans

Overdraft : An overdraft occurs when withdrawals from a bank account exceed the available balance; i.e. over-drawings. This gives the account a negative balance and in effect means the account provider is offering credit.
If there is a prior agreement with the account provider for an overdraft facility, and the amount
overdrawn is within this authorised overdraft, then interest is normally charged at the agreed rate. If the balance exceeds the agreed facility then fees may be charged and higher interest rate might apply.

Bankers Draft :A banker's draft is a cheque (or check) where the funds are withdrawn directly from a bank's funds, not from an individual's account.

Bank note : A banknote (more commonly known as a bill in the United States and Canada) is a kind of negotiable instrument, a promissory note made by a bank payable to bearer on demand, used as money, and under many jurisdictions is used as legal tender. With coins, banknotes make up the cash forms of all modern money. With the exception of non-circulating high-value or precious metal commemorative issues, coins are generally used for lower valued monetary units, while banknotes are used for higher values.
Originally, the value of money was determined by the intrinsic value of the material the money was made of, such as silver or gold. However, carrying around a lot of precious metal was cumbersome and often dangerous. As an alternative, banknotes would be issued. In financial terms, a note is a promise to pay someone money. Banknotes were originally a promise to pay the bearer an amount of precious metal stored in a vault somewhere. In this way the stored value (usually in gold or silver coins) backing the banknote could transfer ownership in exchange for goods or services.
The ability to exchange a note for some other kind of value is called "convertibility". For example a US silver certificate was "payable in silver on demand" from the Treasury until 1965. If a note is payable in demand for a fixed unit, it is said to be fully convertible to that unit. Limited convertibility occurs when there are restrictions in the time, place, manner or amount of exchange.

Capital cost : Capital costs are costs incurred on the purchase of land, buildings, construction and equipment to be used in the production of goods or the rendering of services. In other words, the total cost needed to bring a project to a commercially operable status. However, capital costs are not limited to the initial construction of a factory or other business. For example, the purchase of a new machine that will increase production and last for years is a capital cost. Capital costs do not include labor costs except for the labor used for construction. Unlike operating costs, capital costs are one-time expenses, although payment may be spread out over many years. Capital costs are fixed and are therefore independent of the level of output.

Capital reserve : It is the amount of reserve capital available with an entity .

Convertibility : Convertibility is the quality of money which is officially backed by government reserves of a precious metal, probably the gold standard. Under convertibility, currency is seen as more reliable and less prone to exchange-rate fluctuations (though gold, of course, also changes in value). The Bretton Woods Institutions were set up partially to allow countries to peg their currencies to the US dollar instead of their own gold reserves; the U.S. eventually abandoned the gold standard, and thus convertibility, in 1971.
It can also refer to the convertibility of one currency into another. Some countries pass laws restricting the legal exchange rates or requiring permits to exchange more than a certain amount. Thus, those countries' currencies are not fully convertible.

Currency appreciation : Appreciation is a rise of a currency in a floating exchange rate.
In times of high inflation, appreciation will be common to all balance sheet assets. Generally, the term is reserved for property or, more specifically, land and buildings. In any viable modern economy, such property tends to increase in value over the years - if only because of the scarcity of usable land forces its price in a competitive situation. However, this belief has often caused speculative bubbles to arise.

Devaluation : Devaluation is a reduction in the value of a currency with respect to other monetary units. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.
Depreciation and devaluation are sometimes used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power).

Hot money : In economics, hot money refers to funds which flow into a country to take advantage of a favourable interest rate, and therefore obtain higher returns. They influence the balance of payments and strengthen the exchange rate of the recipient country while weakening the currency of the country losing the money. These funds are held in currency markets by speculators as opposed to national banks or domestic investors. As such, they are highly volatile and will be shifted to another foreign exchange market when relative interest rates make this more profitable.
Hot money is a major factor in capital flight and the ability of developing nations to finance their debt.
As large sums of money can move very quickly to take advantage of small fluctuations in interest rates and currency values, countries which have difficulty raising money through the sale of long-term bonds are particularly susceptible to short-term interest rate pressure, particularly during periods of rapid inflation. These types of transactions were largely responsible for the currency crises in Mexico and Asia during the 1990s

Maturity : Maturity refers to the final payment date of a loan or other financial instrument, after which point no further interest or principal need be paid.

Money supply : Money supply ("monetary aggregates", "money stock"), a macroeconomic concept, is the quantity of money available within the economy to purchase goods, services, and securities.

Risk : The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. It is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment

Special Drawing rights : Special Drawing Rights (SDRs) is a potential claim on the freely usable
currencies of International Monetary Fund members. SDRs have the ISO 4217 currency code XDRSDRs are defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are the euro, the pound sterling, the Japanese yen and the United States dollar. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance. The determination of the currencies in the SDR basket and their amounts is made by the IMF Executive Board every five years.

Term loan : An interest only loan is also called a term loan .That it is provided for a fixed term or time .An interest-only loan is a loan in which for a set term the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the interest-only term the borrower may enter an interest-only mortgage, pay the principal, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option.

Deep discount bonds: the bonds which are issued at a price much lower than that at which they can be redeemed the specified rate. The intention is to provide large capital gains for the holders and to pay a correspondingly low interest rate .In some countries and especially for higher rate tax payers ,less tax may be payable on interest income .

Banking cash transaction Tax : This tax is levied on the withdrawal of cash from the bank accounts by the customer. The customer account will be debited to give effect of this tax. This tax helps in documentation of the economy. It helps reducing cash transactions

Spot market : The Spot Market or Cash Market is a commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective. Spot markets can operate wherever the infrastructure exists to conduct the transaction. The Spot market for most securities exists primarily on the internet.