Mutual Funds Glossary of Terms

1-Day Annualised Yield

The Interest earned on a particular day by a client and annualized assuming all other parameters are held constant. It is calculated by multiplying the daily interest by 36,500 and dividing by the NAV.

30-Day rolling average Yield

This is the average daily annualized returns for the last 30 consecutive days..

Accrued expenses

An amount owed by an entity in respect of its operating activities, for which the benefit(s) relating to such expenses has been enjoyed but payment has not been made.

Example
An entity that offers a service to a fund and whose fee for service rendered is still outstanding for payment. It is an accrued expense on the Fund.

Accrued Income

This refers to income that has been earned but cash has not yet been received as at the date of reporting.

Alpha

This is a measure of return on an Investment or portfolio of investments in relation to a benchmark return.

For example
An Alpha of 2% denotes that the return on the investment or the portfolio is 2% better than the benchmark return while an Alpha of -2% denotes that the return on investment or portfolio is 2% lower compared to the benchmark return.

Alternative investments

Investment in asset classes other than stocks, bonds, cash and cash equivalents which are the traditional asset classes
Examples of alternative asset classes are Real Estate, Private Equity, Commodities e.t.c

Amortisation

Gradual reduction of an amount over time.

Example
A bond with nominal amount of N100,000 and bought at a clean price of N97,000 will result in a discount of N3,000 at purchase. This discount at purchase is a deferred income and as the instrument invested in becomes a day closer to maturity, the portion of discount earned will be amortised and recognized as income earned.

Annual report

A comprehensive report about a company’s activities during the reporting year. The report informs users of such report about the company’s Financial statements, Corporate Social Responsibility report, Director’s report and other quantitative and non-quantitative information.

Annualise

Extending an item to an annual basis by assuming that the projected period has the same characteristic as the vested period.

Example
If interest income for 91 days for a one year instrument is N125,000.00, it will be annualized as follows: N125,000.00 * (Total days in a year/Vested period) i.e. N125,000.00 * (365/91)

Annualised rate

This is a rate representing what will be earned annually based on the rate of a period less than one year. It is useful for the purpose of comparison to determine the best option in terms of rate from a series of investment options.

Example
Instrument A returns 5.3260% in 108 days while Instrument B returns 4.8616% in 91 days, it will be appropriate to compare both instruments on the same basis in order to determine the better yielding instrument. Instrument A: returns an annual rate of 18% {5.3260*(365/108)} while instrument B returns an annual rate of 19.5% {4.8616%* (365/91)}

Appreciation

An increase in the value of an asset.

Asset Management

This involves a series of investment activities carried out on clients’ assets with the aim of generating returns and increasing the value of the assets. Such activities involve investment in, monitoring, administration and control of securities such as equity, fixed income, cash and cash equivalent and alternative investments.

Asset Under Custody (AUC)

The total value of assets managed on behalf of investors that are held by the custodian.

Asset Under Management (AUM)

The total value of investors’ asset that is being managed by an asset management company.

At discount

This refers to an instrument trading below its nominal value (par value).
Example

A bond with par value of N100 which currently trades at N94.50 is said to be trading at a discount.

At Par

This refers to an instrument trading at its nominal value (par value).
Example
A bond with par value of N100 which currently trades at N100 is said to be trading at a par.

At premium

This refers to an instrument trading above its nominal value (par value).
Example
A bond with par value of N100 which currently trades at N103 is said to be trading at a premium.

At The Money Option

A call or put option in which the exercise (strike) price is close or approximately the same as the current market price of the underlying security.

Auditor

A person or firm appointed to carry out series of examination on a client’s report and give an independent opinion on whether the report portrays a true and fair view of the activities carried out on the client’s account for the period under review.

Balanced fund

A mutual fund that invests in a combination of different asset classes without being skewed significantly towards any particular asset class.

Bear

A dealer in a financial market who expects prices to fall. To make gains from the current holdings, the bear sells or borrows to sell the financial asset at the current price with the expectation of a decline in price so as to replace them at a lower cost

Bear market

A market in which the dealer is more likely to sell securities than buy them because there is an expectation of a future decline in market price.

Beta

This is a measure of volatility of an investment or portfolio of investments in relation to the market as a whole. A beta of 1 represents the same degree of volatility with the market as a whole, a beta less than 1 denotes that the Investments or portfolio is less volatile than the market while a beta of more than 1 denotes that the investment or portfolio is more volatile than the market.

Bid Price

The price at which a trader intends to buy a security.

Bid Price of a Mutual Fund

The bid price of a mutual fund is the exit price. It is the price per unit that a unitholder is entitled to upon exiting part or all of one’s holdings

Example
An Investor invested N100,000 3 months ago in a mutual fund when the offer price was N125.20, resulting in an allocated units of 798.7220. Upon redemption of his investment, the bid price was N132.10, the Unitholder at redemption receives N105,511.18 (Units owned * Bid price at redemption date).

Blue chip stock

Ordinary shares of a high quality company that has a long record of earnings, dividend payment and growth.

Bond

A written promise by an issuer (Government, company or other institution) to pay the face value of the instrument at maturity and periodic interest (semi-annually, annually or at maturity date), where applicable, to the holder. It is a debt instrument usually with a stated fixed interest rate and a maturity period from the issue date that span beyond one year.
Bond usually pay coupon periodically, e.g. semi-annually, annually with some not paying interest at all (such bond are referred to as Zero-coupon bond).

Bond fund

Mutual funds that invests primarily in bond instruments.

Broker

An intermediary between a buyer and seller who executes buy and sale orders for a fee.

Brokerage fee

A fee charged by a broker for executing a buy or sale transaction on behalf of an investor. The fee can either be a fixed amount or a percentage of the value of trade executed which adds to the total cost of a buy transaction and reduces the total proceed from a sell transaction

Bull

A dealer in a financial market who expect prices to rise. To make gains, the bull buys financial assets at the current price with the expectation of a rise in price so as to sell for capital gain.

Bull market

A market in which the dealer is more likely to buy securities than sell them because there is an expectation of a future rise in market price.

Capital gain/(loss)

Increase or decrease in the value of an investment.

Capital Market

A financial market in which equity instrument and long term debt obligation are bought and sold. It allows companies to raise funds with repayment period longer than one year. The capital market can be divided into equity market, where shares are be traded and bond market where long term debt obligation are traded.

Capital Market Instruments

Securities traded in the capital market for the purpose of raising money from the issuers’ point of view or earning more money from the holders’ point of view.

Cash equivalent

Highly liquid short term investments that can be easily converted into known amount of cash with insignificant risk of loss in value and a maturity period of three months or less.

Example
- Fixed deposit of a maturity period of 3 months or less from date of placement; - Treasury bill of a maturity period of 3 months or less from date of acquisition either in the primary or secondary market; - Money market fund, etc.

Central Securities Clearing Systems

A capital market agency that facilitates the delivery of securities and settlement of securities executed on the stock exchange.

Close end fund

A Mutual Fund whose units trade similarly to that of ordinary shares of a company. Trading activities, such as purchase and sale of units of the closed end fund are conducted in the open/secondary market. If a unitholder wants to sell his units, there must be a willing buyer in the open/secondary market of such mutual fund.

Commercial paper

A short term unsecured discounted debt instrument issued by a company with maturity period not longer than 270 days. It is majorly issued to finance working capital and normally issued by companies with excellent credit quality since it is not backed up by collateral.

Compound Annual Growth Rate

An annual average compounded rate of return on an investment over a period of time. It depicts the average rate of return earned on an investment annually from the date of investment. It is important to note that this may not be the actual annualized return in each year when the investment was held, but depicts the average return earned yearly on the assumption that the investment grows at a steady rate and the return is compounded.

CAGR = [(Current value/Starting value)(365/n)] – 1
Where
n = no of days since the investment was acquired

Compounding Period

Time during which compound interest is computed, which can be daily, monthly, quarterly, annually or any other basis.

Compound interest

An interest calculation where interest is computed on principal and interest accumulated over a specific period. It is as a result of reinvesting the interest that has been earned over a specific period rather than opting for withdrawal of the interest and reinvesting only the principal.

Compound Interest
FV= A * (1 + (r/m))tm
Where
A is the current value (Amount invested)
r is the interest rate and
t is the period of investment e.g. 1 year, 2 years, 6 months (i.e. 0.5 year)
m is the compounding period e.g. annually (1), semiannually (2), quarterly (4), monthly (12), etc.

Example
Assume that the initial amount invested is N100,000 and annual interest is 10% and compounded annually. At the end of the first year, the investor will have the principal and interest, which is N100,000 + (N100,000*10%) = N110,000.
At the end of the second year, the investor will earn interest of 10% on both the initial N100,000 invested and the interest of N10,000 earned in the first year. This will give the investor a total amount of N121,000 i.e. N100,000 + (N100,000 *10%) + N10,000 + (N10,000*10%) or Amount at the beginning of year 2 times the annual interest rate which is N110,000 + (N110,000 *10%)

Compounding

A process of computing the future value of an amount and in which interest is computed on accumulated interest .

Corporate Bond

Debt instruments issued by company so as to raise funds for long term project.

Coupon Rate

Interest rate on the face value of a bond. It is the annual interest paid on a fixed income security by the issuer expressed as a percentage of the face value of the security.

Example
If the annual interest paid on a bond is N10 and the bond’s face value is N100, the coupon rate is 10% (annual interest / face value). Typically, coupon payments are made semiannually.

Credit risk

Risk that a borrower or issuer of a debt instrument will default in its obligation of making required payments.

Cumulative Total Return (Periodic specific return)

The return of an investment over a given investment period, expressed in non-annualised terms. The formula for calculating this return is (Ending value – Beginning value + Distribution)/Beginning value

Current yield

Annual income (interest or dividend) of a security expressed as a percentage of the current market price i.e. (Annual income/Current price). Compare Coupon rate; Yield to maturity

Custodian

An institution that safe-keeps assets held on behalf of another party for a fee.

Custody fee / Custodial charges

Fee charged by the custodian for rendering custodial services.

Cut-off time

Time in which an event or series of events are deemed to end.

Daily factor

This is the annual interest rate of a money market instrument divided by the number of days in a year. It is a day’s equivalent of an annual yield.

Example
If a money market instrument has a current annualized yield of 18%, the daily factor is 18%/365, i.e. 0.0493% or 0.000493. When multiplied by the opening account balance of each client will show the daily interest for that day.

Date of Record

Date at which the existing holders of the securities qualify to receive dividend or partake in the corporate action.

Declaration date

This is the date a company announces its intention to embark on a corporate action. For instance, it is the date when the company officially declares the amount of dividend that will be paid to the holders of record on the payment date

Debt instruments

An obligation that enables the issuer raise long term source of fund with an obligation to repay the lender or holder of the instrument in accordance to the debt contract.

Debt Market

A financial market where debt instruments are traded. Participants issue new debt securities (primary market) or trade in existing debt securities (secondary market).

Deferred income

Income received before it is duly earned.

Depreciation

A decrease in the value of an asset.

Discount

Difference between the value of an item and the reduced amount paid or expected to be paid for it.

Example
If the face value of a Treasury Bill is N100 and the amount required to purchase the T-bill is N92, then there is a discount of N8 offered.

Discount Rate

The rate applied on the face value of a debt obligation so as to arrive at the purchase consideration (discounted value). The rate expresses the discount (interest) as a percentage of the maturity value (face value). Formula for calculating discount rate is {(Ending value – Beginning value)/Ending value) * (no of days in a year / Tenor)}

Discounting

Process of determining the present value of an amount or streams of amounts to be received or paid in the future.

Diversification

Spreading of investments in a portfolio over different classes of assets and/or companies with the objective of reducing the overall risk of the portfolio

Dividend

The distribution of the part of the earnings of a company to the shareholders based on their holdings at the date of record.

Effective Interest Rate

A rate that represents the actual interest received/paid on an investment. This factor in additional interest received or paid as a result of the effect of compounding.

Formula R= [(1 + ( i / m) )m] - 1

Where
R is Effective Interest Rate
i is annual nominal interest rate
m is the compounding period.

Example
An instrument with a nominal interest rate of 10% with a quarterly compounding period will have an equivalent effective interest rate of 10.3813% R= [(1 + ( 10% / 4) )4] - 1 R = 10.3813%

Equity fund

A mutual fund that primarily invests the funds of the unitholders in equity instruments.

Equity instruments

Instruments that gives proportional right of ownership of a company to investors

Equity Market

A financial market where investors partake in the ownership of a company. This is a market where the shares of a company is traded.

Ethical Investment

Investments in companies and assets that are deemed morally acceptable.

Eurobond

A bond issued at a currency different from the currency of the country the issuer is based or resident.

For Example
A bond issued by a Nigerian based company in Dollars, Pounds, Yen, Yuan, etc. Proceed from the bond will be received in the foreign currency. Coupon and maturity value will also be paid by the issuer in the same foreign currency.

Exchange Traded Fund (ETF)

An investment fund that tracks a particular index and traded on stock exchange.

Expense Ratio

This is a measure of annual operating expenses incurred by a Fund as a percentage of the Asset Under Management. The expense ratio represents the percentage of assets deducted each year to pay cost of running the fund and usually compared with return on the fund to assess fund expenses in relation to fund return.

Expenses

Cost incurred by a business to generate revenue.

Face value

A price given to a unit of a security when it was issued. When the instruments starts trading below this amount, it is said to be trading at a discount and trading above, it is said to be trading at a premium. For an instrument with a repayment obligation, it is the amount the issuer is expected to pay the holder at the maturity date.

Fair Value

The price that two market participant acting independently and with reasonable knowledge of the item will trade.

Final dividend

This is a distribution of profit made out of the final result of the company.

Financial Market

A broad name for market where assets are traded. Financial market includes Stock market, Bond market, money market, forex market, Derivative market, commodity market, etc.

Financial Statements

A report of an organization that shows the net worth & its component, the financial performance, the changes in cash flow.

Fixed Deposit

A financial instrument made available by the bank in form of deposit account that requires investors (account holder) to keep their deposit for an agreed number of days not exceeding 1 year and offers an interest rate higher than the regular savings account.

Fixed income fund

A Fund that invests primarily in fixed interest debt instrument i.e Bond and other fixed income money market instruments.

Fixed interest rate

An interest rate that remains unchanged over the period of the investment.

Forwards (Forward contract)

A contract to buy or sell an asset at a specified price and a specified future date. Assets traded include commodity, currency, financial instrument, etc. For Forwards, the two parties (the seller and the buyer) have an obligation to deliver on their promises.

Example
Entity A enters an agreement to buy $10,000 dollars which currently trades at N290/$1 from Entity B in 6 months’ time at the rate of N300/$1. In 6 months’ time, the spot rate is N312/$1 but as a result of the forward contract, Entity A will buy the $10,000 from Entity B at the rate of N300.

Fund Manager

A person or group of persons with the skill and competence of making investment decisions with respect to the Funds or Collective Investment Funds (Mutual Funds) put in their care to manage. Management of the Fund will entail designing strategy for the fund, implementing the strategies and trading of securities.

Fund Performance

This is a measure of the percentage increase or decrease in fund’s value over a particular time period.

Future Value

The value that an amount invested today will be in some future date. The difference between the value of the amount today and the value in a future date is interest. The formula for calculating the future value of an amount depends on the interest type (simple or compound) Simple interest
FV = A * (1+(r * t)) Where A is the current value r is the interest rate and t is the period of investment e.g. 1 year, 2 years, 6 months (i.e. 0.5 year)

Example
What is the future value of N100,000 in 2 years’ time invested at the rate of 10% assuming simple interest applies? Using the above formula, N100,000 * (1+(10%*2)) = N120,000

Compound Interest
FV= A * (1 + (r/m))tm Where A is the current value (Amount invested) r is the interest rate and t is the period of investment e.g. 1 year, 2 years, 6 months (i.e. 0.5 year) m is the compounding period e.g annually (1), semiannually (2), quarterly (4), monthly (12), etc.

Example
What is the future value of N100,000 in 2 years’ time invested at the rate of 10% assuming quarterly compounding interest applies? Using the above formula, N100,000 * (1 + (10%/4))(2*4) = N121,840.29. The additional N1,840.29 over the simple interest is attributable to the compounding of interest on interest over the period.

Futures (Future contract)

An exchange traded contract to buy or sell an asset at a specified price in a specified future date. Assets traded include commodity, currency, financial instrument, etc. For Futures, the two parties (the seller and the buyer) have an obligation to deliver on their promises. One difference between a Forward and Futures is that Futures are standardized and traded on the exchange.

Growth stock

Shares of companies valued on the basis of anticipated earnings growth potential. They generally grow faster than the economy as a whole and the industry in which they are part.

Hedging

A risk management strategy employed by an entity to minimize the amount of future loss.

Holders of Record

Owners of a security at the date of record (closure date).

Illiquid

State of not having cash or having difficulty in converting asset into cash.

Illiquid stock

Shares of a company that cannot be easily sold because of lack of willing investors or readily available market.

In The Money Option

An option where the strike price for the call option is lower than the price of the underlying asset or where the strike price for the put option is higher than the price of the underlying asset.

Incentive fee (Performance fee)

Fees paid by investor(s) to a Fund manager for surpassing an expected target return.

Income

Value earned by an investor or business in exchange for provision of goods, rendering of services or investment of funds. Income from investment includes: Dividend income, Interest Income, Unrealised gain, Realised gain etc.

Income Tax

Tax imposed by the government on the income earned by individuals or corporate entities.

Investment company

An entity set up with the primary goal of managing investments on behalf of investors.

Inflation

General rise in the price level of goods and services.

Institutional Investors

These are entities with pool of Funds held on behalf of investors with the aim of increasing the value of the assets through investment activities. Examples include Pension Funds, Mutual funds, Banks, Insurance company, Endowment funds etc.

Interest

Amount expected by an investor for lending Funds or the charge to be paid for borrowing money.

Interest Rate

Rate charged by an investor for money lent or required from an issuer/borrower for money borrowed. It is the amount charged expressed as a percentage of the initial amount invested (principal).
Formula {(Ending value – Beginning value)/Beginning value) * (no of days in a year / Tenor)}

Interest risk

Risk of adverse change in value of an interest bearing or interest-linked investment as a result of a change in interest rates

Example
An entity purchased a treasury bill 2 months back at an interest rate of 10%, if the treasury bill currently trades at 11%, the value of investment will reduced as a result the increased in interest rate.

Interim dividend

This is a distribution of profit made out of the result of a company announced within the year.

Internal rate of return

The minimum rate required (assuming inflows are reinvested at current yield) on an investment so as not to make a loss on the investment. It is the rate that equates the initial investments (I) with the present value (PV) of all cash inflows expected from the investment, i.e. at IRR, I = PV or NPV=0.

Investment grade


A rating which indicates a high credit quality of a bond thereby placing a relatively low risk of default on the bond.

Investment grade bond

A bond that qualifies as investment grade.

Issuer

An entity that creates a new instrument (Financial liability or equity) or additional units of existing instrument, upon completion of the required registration and approval process, to raise fund for financing business operations or expansion.

Junk Bond

A bond that meets the Junk rating criteria. Due to its embedded risk of default, a Junk bond compensates the risk with lower purchase price and an higher nominal rate when compared with an Investment grade bond.

Junk Rating

Rating indicating a bond has a relatively high rate of default and therefore not an investment grade.

Liquid

State of having cash or asset that can be easily converted to cash.

Liquidity

The ease of an asset to be converted to cash with insignificant risk of loss in value. Among all assets, cash is the most liquid because it is already in its liquid form.

Liquidity risk

The risk that borrower or issuer of an instrument will be unable to meet short term obligation due to its inability to convert its asset into cash or risk that an asset will be readily converted to cash without the possibility of a loss in value.

Listed Securities

Securities that are traded through a stock exchange, e.g. The Nigeria Stock Exchange. All listed securities are quoted securities.

Long term investments

These are investments made by an investor with an expectation of being converted into cash after one year either by sale or upon maturity.

Managed Account

An investment account professionally managed by an investment manager for a high net worth investor.

Management fee

A fee charged by an Investment company for managing funds or pool of assets on behalf of investors.

Market capitalization (Market Cap)

This is the total number of outstanding shares multiplied by the current market price per share of a company.

Market price

The amount in which an item is being traded in an active market.

Market risk

The risk that the fair value of a financial instrument (investment) will change as a result of changes in market dynamics.

Maturity date

Date in which the face value of an instrument is due for repayment by the issuer.

Minimum holding period

The minimum number of days an investment must be held by an investor before termination of investment.

Money Market

A financial market where short term funds are borrowed. The instruments traded in the money market have a maturity period of one year or less from initial date of issue.

Money market fund

A mutual fund that invests primarily in money market instruments.

Money Market Instruments

These are short term instruments with maturity period of one year or less from the initial issue date.

Money weighted return

Measure of return in a portfolio. See Internal rate of return (IRR)

Mutual Fund

A pool of funds professionally managed by an investment company. The major advantages of investing or buying units of a mutual fund are: access to professional management and diversification (minimizing risk and co-ownership of various securities within a single portfolio with minimal amount).
Mutual funds always have a bid and offer price. The offer price is the entry price required to buy unit(s) of a mutual fund while the bid price is the exit price, price required to sell or redeem units owned in a mutual fund.
See also Money market fund, Balanced fund, Equity fund, Bond fund, Fixed income fund.

Net Asset Value

Total value of assets in a fund less the fund’s liabilities.
NAV = Total value of Assets – Accrued Expenses
For example A Fund with value of Shares of N100,000,000; Total value of Money market instrument of N30,000,000; cash of N4,000,000 and liabilities of N3,350,000 is said to have an NAV of N130,650,000 (N100m + 30m + 4m -3.35m)

Net Asset Value per unit

This is the NAV attributable to each unit in a mutual fund.

Nominal Value

See par value

Offer Price

The offer price of a mutual fund is the entry price. It is the price per unit that a unitholder is required to pay for a unit of the Fund.

Open end fund

A mutual fund that issues new units to existing and new unitholders at the prevailing offer price and also buys back units from investors willing to redeem their investment at the prevailing bid price. Unlike Close end mutual funds where units are traded between investors, the units of an open end mutual fund are either created or cancelled by the Fund Manager when investors buy or sell respectively

Options

The right to buy (call option) or sell (put option) an asset in a future date at a pre-determined price.

Ordinary shares

Unit of ownership in a company with voting right and right to share of company’s profit. In the event of liquidation, ordinary shareholders are the least ranked.

Out Of The Money

An option where the strike price for the call option is higher than the price of the underlying asset or where the strike price for the put option is lower than the price of the underlying asset.

Over-The-Counter Market (OTC)

Market for buying securities not listed on an organized stock exchange but have opted and met the requirement for trading in such market.

Par

Amount per unit in which a security is represented/registered. The par value could be any figure as determined by the issuer e.g. 50k, N1, N100, N1000. An amount above this is said to be at a premium and below is said to be at a discount.

Past due

Refers to when the proceed of an investment is due for collection but has not yet been received. It is an expected receipt whose payment date has passed.

Payment date

This is the expected date in which a declared dividend or distribution will be made.

Portfolio

Collection of different securities by asset class, company or any another basis to reduce risk by diversification.
An example of portfolio is a mutual fund that invests in equities of Coy A, B , C; Treasury bills issued by the Government; Fixed deposit of Coy D & E and invests in Commercial paper of Coy F.

Portfolio value

See Net Asset Value.

Premium

Amount in excess of the par or nominal value of a security. For example, if a security with par value of N100 is trading at N107, the premium is N7 (N107 – N100).

Prepaid expenses

Expenses already paid for but for which the service expected has not been enjoyed.

Present value

The current worth of future cash flow(s). It is the amount that future sums of money to be received or paid is worth in today’s terms.

Primary market

A financial market where securities are issued for the first time.

Principal

This is the initial amount invested in a security.

Prospectus

A document containing a all relevant information in connection with the issue of new securities.

Quoted Securities

Securities whose prices are quoted on the stock exchange or any other market such as the Over the counter market (OTC).

Realised Gain/(Loss)

This is the gain or loss resulting from the sale of an asset. The difference between the proceed from sale of an investment and the carrying amount (or cost) of the investment.

Redemption

Repayment of mutual fund holdings at the prevailing bid price when a unitholder decides to exit part or all of his/her holdings.

Register closure date

Date at which the existing holders of the securities qualify to receive dividend or partake in the corporate action.

Repo rate

This is the return on a repurchase agreement between the sale date and the repurchase date.

Formula
(R – S)/S * (m – v)/365

Where
R is the Repurchase amount
S is the Sale amount
v is the date the asset was sold
m is the date the asset was repurchased

Repurchase Agreement

Referred to in full as “Sale & Repurchase agreement”, is an agreement where Entity A sells an asset to Entity B at Price X and agrees to buy back the same asset in the future at a predetermined price Y.

Return on Investment (ROI)

The income (profit) earned on an investment as a percentage of the initial amount invested.

Risk

The likelihood that the actual outcome would be different to the expected outcome.

Rollover

Reinvestment of the proceeds from a matured investment into a new issue of the same security with the tenor of the new issue starting from the date the old issue matured. An entity can rollover the principal only or both principal and interest.

Secondary market

A market in which securities already in existence are traded between market participants.

Securities lending

The act of temporarily giving out a financial asset for a fee and an expectation of receiving back the security at an agreed date.

Security and Exchange Commission (SEC)

A government agency entrusted with the mandate of regulating the capital market.

Settlement date

A date in which trade must settle. Thus, the buyer receives the security while the seller receives the proceeds of sale. This date defines when the right of ownership passes to the buyer.

Settlement Period

The period of time between the trade date and the settlement date.

Shareholder

An entity with ownership interest in a company. It includes individual, company, other institutions that own at least one unit of shares in a company.

Shariah-Complaint funds

Investment funds that invests in shariah compliant investments such as non-interest bearing investments.

Short term investments

These are investments made by an investor with an expectation of being converted into cash within one year either by sale or maturity.

Simple interest

Interest computed only on the principal. FV = A * (1+(r * t)) Where A is the current value r is the interest rate and t is the period of investment e.g. 1 year, 2 years, 6 months (i.e. 0.5 year) Example What is the future value of N100,000 in 2 years’ time invested at the rate of 10% assuming simple interest applies? Using the above formula, N100,000 * (1+(10%*2)) = N120,000

Skewness

A statistical term that describes a measure of asymmetry from the normal distribution in a set of data.

Sovereign Bond

A bond issued by the national government.

Spot rate

An agreed rate or price for immediate delivery or settlement of an asset.

Spread

The difference between the bid and ask price of an asset.
If a security is quoted by a dealer as having a bid/ask price of N300/N305, it denotes that the dealer is willing to buy the security at a bid price of N300 and sell the same security at an ask price of N305, resulting in a spread of N5.

Strike (Exercise) Price

A predetermined price in which the holder of an option can buy or sell the underlying asset.

Stock Exchange Market

A financial market where listed securities are traded.

Subscription

Agreement to purchase a security or the purchase of units of a mutual funds.

Swap

A contract in which two parties agrees to exchange financial items. The item traded can be Interest (Fixed against variable), commodity, currency, etc.

For example
Entity A buys an instrument with Face value of N25,000,000 at fixed interest of 18% and Entity B buys an instrument with face value of N25,000,000 at a variable rate of NIBOR + 2%. Both entities enter a Swap deal to exchange the variable interest with fixed interest.

Assumption 1 : NIBOR stands at 14% at year end Entity A will receive N4m (N25m * 16%) as a result of the Swap while Entity B will receive N4.5m. Entity B has therefore made gain of N0.5m as a result of the Swap deal.

Assumption 1 : NIBOR stands at 18% at year end Entity A will receive N5m (N25m * 20%) as a result of the Swap while Entity B will receive N4.5m. Entity A has therefore made gain of N0.5m as a result of the Swap deal.

Tender offer

A bid to buy the shares of a company at a specified price, usually above the current market price by a company willing to take over a target company. The consideration may be settled by cash, issue of shares or combination of cash and shares.

Tenor

This is the time-to-maturity of an interest bearing instrument with a stated maturity date.

For example, if an interest bearing instrument is purchased by an entity on 01 January 2017 with a maturity date of 31 December 2017, the tenor is 364 days i.e. number of days from 01 Jan to 30 Dec (31 Dec is not inclusive as this is the date when the maturity value will be received by the holder of the security so interest is not earned on this day).

Time value of money (TVM)

A money concept that concludes that an amount today is worth more the same amount in a future date due to the ability of the amount today to grow in value through investing.

TVM Formula
Compound Interest FV= A * (1 + (r/m))tm

Where
A is the current value (Amount invested)
r is the interest rate and
t is the period of investment e.g. 1 year, 2 years, 6 months (i.e. 0.5 year)
m is the compounding period e.g. annually (1), semiannually (2), quarterly (4), monthly (12), etc.

Simple Interest

FV = A * (1+(r * t))
Where

A is the current value
r is the interest rate and
t is the period of investment e.g. 1 year, 2 years, 6 months (i.e. 0.5 year)

Time weighted return

A measure of investment returns that eliminates the effect of distortion caused by inflow from clients and outflow to clients. The period is divided into sub-period. Each sub-period start upon the occurrence of external flow (Transfer of cash or securities to or from client) and portfolio return for each period is computed before each flow.

TWR = [(Return for sub-period A) x (Return for sub-period B) x (Return for sub-period C) x (Return for sub-period N)] – 1
Where
Return for each sub period is computed as (Portfolio value at end of sub period – Portfolio value at the beginning of the sub period)/ Portfolio value at the beginning of the sub period. The returns of each sub-period are chain-linked to arrive at the return for the entire period

Tracking Error

The standard deviation of the difference between a portfolio return and the mirrored index or basis or benchmark.

Trade date

This is the date parties to a contract enters into the contract or executes a trade

Transaction costs

Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. Examples include, broker’s fee, legal fee, professional adviser’s fee, etc.

Treasury Bill (T-bill)

A discounted short-term debt security issued by the federal government with a maturity of less than one year.

Uncertainty

A situation of ambiguous, unclear and unpredictable outcome.

Unitholder

An investor who owns money and has been allocated units in a mutual fund.

Unlisted Securities

Securities that are not traded through a stock exchange.

Unquoted Securities

Securities whose prices are not quoted on the stock exchange or any other market such as the Over the counter market (OTC).

Unrealised Gain / (Loss)

Change in the value of an asset that is still held by the entity.

Value date

Date in which a security becomes effective in the hands of the holder and in which the risk and reward is transferred from the seller to the buyer. See Settlement date.

Value investing

An investment strategy where investors seek to buy undervalued stock so as to profit from their sale when the market realizes their true value in the future.

Value stock

Stock adjudged by a value investor to be undervalue in the market.

Variable interest rate

An interest rate that varies as the rate or basis of the underlying item changes.

Example
A 5-year security at inception was defined to have an interest rate of “Inflation rate at the of the year + 2%”, at the end of the first year, the inflation was 9%, therefore the interest receivable/payable was 11% and at the end of the second year inflation was 7.5%, the interest receivable/payable was 9.5%.

Volatility

A feature embedded in some securities in which there is an unpredictable dispersion in the return as a result of increase or decrease in prices or market rates.

Weighted Average Maturity (WAM)

This is the weighted number of days remaining for the debt instruments in a portfolio to mature. The higher the WAM, the farther the portfolio is to maturity.

Example
Assuming a portfolio has three debt instruments: Instrument A has a value of N30,000,000 with remaining tenor of 290 days ; Instrument B has a value of 12,500,000 with remaining tenor of 320 days and Instrument C has a value of N24,000,000 with remaining tenor of 130 days.
The WAM is {(Instrument A’s value/Total Instruments’ value) * Instruments A remaining tenor} + {(Instrument B’s value/Total Instruments’ value) * Instruments B remaining tenor} + {(Instrument C’s value/Total Instruments’ value) * Instruments C remaining tenor}
i.e. {(N30,000,000/N66,500,000) * 290} + {(N12,500,000 / N66,500,000) *320} + {(24,000,000 /N66,500,000) * 130} = 238 days (approximately)

Withholding Tax

An advance deduction of income tax at source. It is mainly charged on services rendered

Yield

The real rate of return of an investment to an investor. This takes cognizance of the price, frequency of interest payment within the year (e.g. annually, semi-annually etc), nominal interest rate etc.

Yield to call

Effective interest rate on a bond expected to be held until the call date and call option exercised by the issuer.

Yield to maturity

Effective interest rate on a bond expected to be held until the maturity as well as an expectation that the periodic interest received will be reinvested at the same rate as the bond’s current yield.

It reflects the internal rate of return of all cash flows from the bond when held to maturity.