Banking and Stock Glossary
The selling, on a regular basis, by a firm of its short-term accounts receivable arising from supplies and services to a factoring company. Factoring is a form of financing which enables companies to procure liquidity. Othr significant aspects are the assumption of default risk by the factoring company as well as its responsibility for related debt collection and dunning procedures.
Fair value is a rational estimate of the reasonable price of a security or derivative, i.e. the price at which the financial instrument is neither overvalued nor underrated. In other words it is a hypothetical market price under idealized conditions. If an instrument is not fairly priced, price differentials can be leveraged without any risk, leading to the realization of so-called arbitrage profits.
Traded bonds of the Federal Government with a maturity of 10 to 30 years. Federal bonds have a central position on the German capital market and in capital transactions with foreign countries. Their terms and conditions have an important benchmark function for the entire market for debt instruments denominated in EUR. Both Federal bonds and medium-term notes have fixed coupons; the issue prices vary. The purchase of Federal bonds is subject to no restrictions.
See Registered debt securities.
The Federal Financial Supervisory Authority (BaFin) with official domiciles in Bonn and Frankfurt am Main was founded on May 1, 2002 and took over the duties of the former supervisory offices for banking, insurance and securities trading. In Germany, therefore, there is an official bancassurance regulator under one roof covering about 2,600 banks, 800 financial services providers and roughly 700 insurance companies. The Authority is funded exclusively from fees and charges paid by the supervised institutions and companies and is independent of the Federal budget. The overriding goal of the BaFin is to safeguard the functional operability of the entire financial sector in Germany. Sub-targets can be derived from this. Firstly, protecting the solvency of banks and financial services providers, and secondly ensuring customer and investor protection. The BaFin itself is subject to legal and material supervision by the Federal Ministry of Finance. See also www.bafin.de.
Regular issues of the German Government with a fixed rate of interest and a maturity of five years. Federal notes can be bought and sold daily after introduction to stock exchange trading. Federal notes are counted as "gilt-edged" securities.
Federal Government issue, fixed-income. Interest is paid annually (Type A, 6-year maturity) or with compound interest added to nominal amount at redemption (Type B, 7-year maturity). They are not listed in stock exchange trading.
The Federal securities Administration, as a financial services agency, offers investors a securities custody service free of charge for Federal Government securities and the commission-free sale of Federal savings notes, Federal notes and Federal Treasury financing papers. It acts as notary public and trustee for the Federal Government and registers the loans taken up and guarantees issued by the Federal Government and its special fund, the international participation and contribution obligations assumed by the Federal Government as well as its other financing instruments admissible under the German Budget Act.
Federal Treasury notes are one-off issues with a maturity of 2 years placed at quarterly intervals (March, June, September, December) solely by auction. In principle, anyone can buy them. However, only banks that belong to the Bund Issues Auction Group are eligible to make direct bids for them. Other banks and non-banks can commission members of the Auction Group to place bids or can buy Federal Treasury notes on the secondary market. Federal Treasury notes are admitted to trading on the German stock exchanges.
Abbreviation for Frankfurt Interbank Offered Rate.
Standard procedure on international bond markets. Initially, terms and conditions for a bond issue are established as a spread to a benchmark. Investors subcriptions are then taken up and the issue is placed at a fixed yield, known as the reoffer price. The sale to investors is settled quickly, within a few hours. The FPRO procedure is very similar to the book-building process for newly issued shares.
In the broadest sense a term for any security whose interest rate remains constant throughout its life and which is redeemed at its face value. This includes corporate bonds, public-sector bonds and mortgage bonds (Pfandbriefe). In current usage the term is used to describe all securities that constitute a creditor's claim, including zero bonds and floating rate notes. The opposite are equity instruments (such as shares), which represent an ownership interest in a company and which entitle the shareholder to dividend payments reflecting the company's business success.
The term "fixed-income security" can refer to bonds, mortgage bonds, debentures, annuity bonds. Fixed-income paper embodies a right to repayment of a nominal value plus interest. Issuers use bonds to borrow on the capital market. The rights securitized by a bond are regulated by law, but as a rule are supplemented by additional bond conditions. Depending on the type of interest rate arrangements agreed, a distinction is drawn between bonds at constant interest over the entire life, bonds at variable interest during the life and bonds with no nominal interest (zero bond). Depending on the issuer, a distinction is also drawn between public-sector bonds (e.g. Treasury bonds, bonds of the Federal states, municipal bonds), industrial bonds and bonds issued by banks, mortgage banks or public-sector institutions (mortgage bonds and communal bonds)
Traditional procedure for placing securities, in which the issuing price is fixed by the lead manager and the issuer prior to publication of the sales prospectus. The price is established on the basis of the company's fundamentals, also considering the stock market valuation of similar companies and the overall market situation. Opposite: book-building.
Also known as time deposit. A deposit of funds with a bank under an agreement stating that the funds must be kept on deposit for a specified period of time, at least 30 days. The actual term is established on contract conclusion. Time deposit accounts earn higher interest rates than current accounts, with interest depending on the amount invested, the agreed term and general market interest rates. On maturity, fixed-term deposits can either be prolonged (usually at the current interest rate) or placed on sight deposit accounts.
Investment income taxation procedure at source. The levy is independent from the personal tax rate of the taxpayer. By deduction of the flat rate tax the investment income tax obligation of the taxpayer is met. This method was introduced in Germany on 01 January 2009. Until then the withholding tax on interest income was applied.
Freely tradable shares of a company held by many shareholders. The number of shares that are not held by major shareholders and can therefore be acquired and traded by the general public. The larger the float, the larger the trading volume of a share. The shares in the share index of Deutsche Börse are weighted on the basis of the float according to trading volume and market capitalization.
Bonds with a variable interest rate (floaters), which changes every three or six months in line with short-term euro market interest rates (LIBOR or Euribor). The coupon may also be linked to the inflation rate. Since floaters are not subject to significant price fluctuations they afford investors a certain amount of protection against the risk of interest rate changes on the market. Floaters are an alternative to time deposits. Reverse floaters enable investors to profit from falling interest rates, since the coupon is paid as a combination of a fixed basic interest rate minus a certain reference rate.
A floor is a lower limit. An interest rate floor guarantees a minimum interest rate level or interest amount. It is an agreement between a floor seller and a floor buyer such that, when the market rate falls below a specified limit (floor rate), the floor seller pays the floor buyer the difference between the rates for an agreed priod of time (floor term). A floor is the opposite of a cap.
Abbreviation for free on board. In international trade, FOB is a facility for distributing the costs and risks of loss or damage between the importer and exporter, as governed by the Incoterms. Under an FOB arrangement, tthe seller delivers when the goods pass the ship's rail at the named port of shipment. Responsibility for all costs and risks pass to the buyer at that point. In international commerce, FOB and CIF (cost, insurance, freight) are the most common means of distributing responsibility in the context of documentary letters of credit.
Issued on a country's capital market by a company not resident in that country; foreign bond issues are denominated in the currency of the country of issue and, for the most part, are placed, traded and listed on a stock exchange in that country.
Foreign exchange are claims denominated in foreign currency which are payable abroad: credit balances held with foreign banks in foreign currency. Drafts and cheques denominated in foreign currency payable abroad. Strictly speaking, foreign notes and coins do not constitute foreign exchange in the classic sense of the term.
Floor trading or electronic trading system for foreign exchange dealing.
Foreign exchange dealing is conducted in unoffical trading by telephone or via electronic trading systems. It constitutes the world's biggest financial market and has the highest average daily turnover figures.
Bank notes and coins as opposed to foreign exchange.
Special form of securities depository where the buyer or depositor only has a contractual claim on the return of equal, but not identical, securities. Foreign securities depositories are used, for example, for the safekeeping of securities abroad. The securities account holder receives a credit from his domestic bank for his securities acquired and deposited there.
Forfaiting is a form of financing (generally in export business) where receivables due at a later date are sold to a bank or financial services provider without recourse. In this connection 'à forfait' means that the forfaiter (buyer) assumes all economic and political risks involved, without recourse to the exporter. The seller is only liable for the claim being valid and effective. Forfaiting is a means of mobilizing funds immediately when payment terms have been given. That leads to improved liquidity and helps streamline the balance sheet by reducing capital backing requirements. The claims are usually in the form of bills of exchange and are generally secured by bank guarantees or commercial letters of credit from first-class banks in the importer's country.
False documents, especially counterfeit banknotes or securities, are referred to as forgeries.
Term (similar to mark-down) used when a currency's forward rate is lower than its spot price. The currency is then traded with a forward discount. The opposite is known as a contango (mark-up).
An FRA is an over-the-counter interest futures contract. Two parties agree to pay a certain amount at some future date. This amount is the difference between two interest rates - the currently agreed contractual interest rate (FRA rate) and the future market interest rate (reference rate) - relating to a certain nominal amount and a fixed future period (hedging period). The nominal amount itself does not change hands.
With forward transactions, the terms alone are specified upon conclusion of the contract, whereas payment and delivery take place in the future. This type of trading is possible with all kinds of goods, e.g. with securities, interest rates, currencies, precious metals and agricultural goods. A distinction is made between commodity futures and financial futures. Forward transactions can be carried out on an organized futures market (futures exchange) or over the counter. The buyer enters into a long position, the seller into a short position.
Abbreviation for Forward Rate Agreement.
FIBOR was formerly a daily interest rate for interbank time deposits denominated in D-Marks at the Frankfurt financial centre. It was a reference rate for variable-interest bonds. Since the introduction of the euro, this function has now been assumed by EURIBOR.
The FSE, domiciled in Frankfurt am Main, is Germany's major stock exchange. It is operated by Deutsche Börse AG.
Shares in a company that are owned by many different shareholders and can be freely traded in the capital market. The float refers to shares that are not held by majority shareholders, and can therefore be acquired and traded by the general public. As a rule, the larger the float, the easier it is for investors to buy and sell stock.
As a rule, when mutual fund units are purchased, a premium known as the "front load" is charged as consideration to cover the selling costs. This front load is expressed as a percentage of the repurchase price. The repurchase price plus the front load gives the issue price.
Special kind of insider trading. Frontrunning refers to investment advisors, analysts or stock market traders buying securities before recommending them to their clients for purchase. It is also known as frontrunning if bank employees do not execute customer orders until they have purchased or sold securities for their own account. Frontrunning is prohibited pursuant to the German Securities Trading Act.
Abbreviation for Frankfurt Securities Exchange.
The assets of an investment company that are invested in securities, real estate, securities or other money market istruments. Mutual funds pool the assets of many investors and invest them in stocks, bonds and other assets. The advantage for small investors lies in being able to diversify their investments by purchasing units in various funds, while reducing their overall investment risk at the same time. Mututal funds are the investment of choice for investors who do not wish to constantly monito their investments, and who prefer to leave the task of tracking and analyzing the market, and making investment decisions, up to professional portfolio managers.
Mutual funds which invest their fund assets in other funds. Designed to achieve greater diversification and risk spread.
Means freely exchangeable or replaceable. Fugible items are objects which can be measured in terms of size, quantity or weight and are therefore easily interchangeable. Stock exchanges are markets for fungible securities.
Derivatives contract in which the seller agrees to deliver, and the buyer agrees to purchase, a certain quantity of an underlying commodity or instrument at a predetermined price on a specified settlement date. Futures are highly liquid standardized financial instruments whose value depends on the value of the respective underlier. There are two types of futures: financial futures and commodity futures. The underlying instruments of financial futures are stock indices, currencies, or interest rates, whereas commodity futures are tied to the movements of real goods such as raw materials or agricultural products. There are two sides to a futures transaction. A "long position" represents the buyer's obligation to purchase the underlying instrument or commodity at a predetermined price on settlement date; a "short position" represents the seller's obligation to deliver the underlying instrument or commodity, in exchange for which he receives the agreed purchase price. Today, most futures contracts do not require actual delivery of the underlier, but are settled by means of a cash exchange.
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