Banking – Some Terminology
and Meaning
banking
operations
Definition
The legal transactions executed by a bank in its daily business, such as providing loans, mortgages and investments, depending on the focus and size of
the bank.
repo rate
Definition
The discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system. To temporarily expand the money supply, the central
bank decreases repo rates (so that banks can swap their holdings of
government securities forcash). To contract the money supply it increases the repo rates. Alternatively, the central bank
decides on a desired level of money supply and lets the market determine the appropriate repo rate. Repo is short for repossession.
asset
Definitions (2)
2. Accounting: Something that an entity has
acquired or purchased, and that has money value (its cost, book value, market value, or residual value). An asset can be
(2) an enforceable claim against others,
such as accounts receivable,
(4) an assumption, such as goodwill.
Assets shown on their owner's balance sheet are usually classified according to the ease with which they can be converted into
cash.
intangible
assets
definition
Assets that have
a value but which cannot be seen, e.g. goodwill or a trademark
cash flow statement
definition
One of the four reports that comprise a company's financial statement. The cash flow statement accounts for the company's inflow and outflows of cash during
the reporting period, breaking it down by operating activities, investing activities, and financing activities. Investors pay particular attention to how much of the cash flow is generated by operations versus non-operations sources, like investments and the accumulation of debt.
Incoming and outgoing of cash, representing the operating activities of an organization. In accounting, cash flow is the difference
in amount of cash available at the beginning
of a period (opening balance) and the amount at the end of
that period (closing balance). It is
called positive if the closing balance is higher than the opening balance,
otherwise called negative. Cash flow is increased by (1) selling more goods or services, (2) selling an asset, (3) reducing costs, (4) increasing the selling price, (5) collecting faster, (6)
paying slower, (7) bringing in more equity, or (8) taking a loan. The level of cash flow is not
necessarily a good measure of performance, and vice versa: high levels of cash flow do not
necessarily mean
income
statement
definition
One of four reports that comprise a company's Financial Statement. The Income Statement is
a declaration of revenue for the reporting period, expenses associated with earning it. The
income statement is also where the company reports its earnings per share (EPS) and diluted earnings per share. Also known as
a Profit and Loss Statement
accounts
payable
definition
Monies owed by a company for the purchase of goods or services. Accounts payable are a component
of current liabilities. Compare to Current Assets.
accounts
receivable
definition
Monies due to a company towards sale of goods or services. Accounts receivable is a component
of current assets.
price to
earnings ratio (P/E)
definition
A measure of a company's relative market value, calculated by dividing the price per share by net earnings. A lower P/E when compared to
other companies in the same industry can indicate that the security may be currently undervalued in the market. See Value Investing.
dividend
definition
A periodic distribution of a portion of a
company's earnings to its shareholders. Firms that pay dividends are typically mature companies that are no longer growing at a rate that provides incentives to investors in the form of significant increases in the price of their stock. Instead, they try to make the stock more attractive to investors
through the payment of dividends. See Growth Stock, Income stock, Record Date; Ex-Dividend.
reserve fund
definition
Profits in
a business which have not been paid out as dividend but have been ploughed back into the business
consumer price index (CPI)
Definition
A measure of changes in the purchasing-power of a currency and the rate of inflation. The consumer price index
expresses the current prices of a basket of goods and services in terms of the prices during the same period in a previous year, to show effect
of inflation on purchasing power. It is one of the best
known lagging indicators. See also producer price index.
letter of
credit (L/C)
Definition
A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank).
A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe. These
documents almost always include a clean bill of lading or air waybill, commercial invoice, and certificate of origin. To establish a letter of credit in favor of the seller or exporter
(called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuing bank, or negotiates credit. Letters of credit are formal trade instruments and are used usually where the
seller is unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the creditworthiness of a bank for the
creditworthiness of the buyer. Thus, the international banking system acts as an intermediary between far flung exporters and importers. However, the banking system does not take on any responsibility for the quality of goods, genuineness of documents, or any
other provision in the contract of sale. Since the unambiguity of the
terminology used in writing a letter of credit is of vital
importance, the International Chamber Of Commerce (ICC) has
suggested specific terms (called Incoterms) that are now almost
universally accepted and used. Unlike a bill of exchange, a letter of credit is a non-negotiable instrument but may be transferable with the consent of the applicant. Although letters
of credit come in numerous types, the two most basic ones are (1)
Revocable-credit letter of credit and (2) Irrevocable-credit letter of credit, which
comes in two versions (a) Confirmed irrevocable letter of credit and
(b) Not-confirmed irrevocable letter of credit.
drawee
Definition
Entity that is expected to accept and pay a bill of exchange (check, draft, letter of credit, etc.) on presentation or on a certain date
(called due date or maturity date). See also payee.
bank draft
Definition
Bill of exchange drawn by a bank on itself,
or on a correspondent bank in another city or country. Bank drafts are commonly used by banks in dealings with other banks, or when
a creditor or seller is unwilling to accept an ordinary check from a debtor or buyer in another city or country. (In
local transactions a certified check or a cashier's check serves the same purpose.) When a customer (the drawer) requests a draft, the bank withdraws
the amount of the draft from his or her account and holds it to honour the draft on
its presentment by the drawee. Because, in normal circumstances, a
draft is certain to be paid, it is generally accepted as a cash equivalent. Also called banker's draft.
revenue
Definition
The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted
to arrive at net income. Also called sales, or (in the UK) turnover.
fixed cost
Definition
A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages.
While in practice, all costs vary over time and no cost is a
purely fixed cost, the concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed costs are significantly
different from those with high variable costs. This difference affects the financial structure of the organization as
well as its pricing and profits. Thebreakeven point in such organizations
(in comparison with high variable cost organizations) is typically
at a much higher level of output, and their marginal profit (rate of contribution) is also much higher.
debit
Definition
In a double-entry bookkeeping, entry on the left-hand side of an account record. It has the effect of decreasing a
capital, liability, or revenue account, or of increasing an asset or expense account. See also credit.
credit
Definitions (4)
1. Accounting: An entry on the right-hand side of an account record in double entry bookkeeping. It has the effect of
decreasing an asset or expense account, or of increasing a capital,
liability, or revenue account. See also debit.
2. Banking: Purchasing power created by banks through lending based on fractional reserve system.
3. Commerce: An agreement based largely on trust under which goods, services, or money is exchanged against a promise to pay later. Also called commercial credit.
4. Short form of the term letter of credit.
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