Interesting financial definitions

Asset-backed commercial paper (ABCP) is a form of short-term debt created when an issuing party (usually a bank or other financial institution) agrees to pay a given sum of money to a recipient, typically a company in need of immediate cash or other liquid assets, in exchange for the recipient's sale of certain assets to the issuer as collateral, in addition to the recipient's promise to pay back the sum in between 90-270 days.

The issuing party, after purchasing receivables from the company desiring to issue ABCP and thus obtaining rights to the cash flows they create, then channel those cash flows into the ABCP it eventually sells to private investors.

A benchmark is a proxy for a market, economy, class of equity, or sector, generally setting a standard against which the performance of a stock, bond, mutual fund, commodity, or other security is measured.

Benchmarks are also used to gauge the health of a market, sector, or entire economy.

Call price is the price, specified at issuance, at which a bond or preferred stock can be redeemed by the issuer. It is also referred to as the "redemption price".

Forex (FX) is short for foreign exchange and refers to the trading of one currency for another. Unlike stocks or futures, currency trading is an over-the-counter market with no central exchange.

Currencies typically trade in pairs such as the EUR/USD or USD/JPY. Currencies common to Forex tend to be the most liquid currencies such as the U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD).

Margin is a term given to borrowed money (and associated accounts) used to purchase securities. When an investor buys stocks, bonds, futures contracts, currencies, or other equities with this borrowed money, she is said to do so "on margin".

Functionally, margin can be thought of as a simple loan from a broker to augment one's position in a security. This requires, however, that a certain minimum of the investor's own money be available either in the investment or simply inactively held in the account. This minimum amount is generally some percentage of the loan total issued by the brokerage and is called the "margin requirement" or "minimum margin requirement". If the value of the investor's stake in the security falls below the minimum margin requirement, the brokerage will typically issue a #Margin Call or, in some cases, automatically sell off the security to recoup or prevent further losses.

Though each exchange sets the limits for margin transactions, brokerages offer margin buying to their clients at varying rates beyond the brokerage mandated limits, though never in violation of them. For example, an exchange may have a minimum margin requirement of 25%, but a brokerage might instead impose a 30% minimum margin requirement on its clients.

The size of the initial loan made by a brokerage is some percentage of the original money the investor puts up and is called the "initial margin requirement" or "initial margin limit". Typically the maximum balance a broker will allow to remain outstanding with such a loan is 50%. The reasons why this is common practice have their roots in the Great Depression, as excessive amounts of land-speculative margin debt (typically around 90% of the total value of the speculated land) combined with manifold concurrent margin calls have been cited as major causes Black Friday in 1929 and consequently the Great Depression. As such, somewhat more conservative margin limits have been imposed to prevent a similar catastrophe from reoccurring.

Margin debt is usually incurred with either the hope or expectation that subsequent increases in the stock's value will cover the remainder of what is owed to the broker, thus eliminating the buyer's debt (and possibly creating a profit).

The Price to Book Ratio (alternately Price to Book, Price to Book Value, Price/Book, P/B, or P to B) is a financial metric used to compare a company's book value to the share price at which it is currently trading. It is generally calculated by dividing the share price by the book value per share, though it can also be calculated by dividing the company's market capitalization by the total book value listed on the balance sheet.

The Price to Book Ratio varies dramatically between industries. A company that requires more assets (e.g. a manufacturing company with factory space and machinery) will generally post a drastically lower price to book than a company whose earnings come from the provision of a service (e.g. a consulting firm).

Price to Book is often used to gauge a stock's relative value. A company trading at a low price to book, particularly when compared to other companies in its industry, is thought to be undervalued relative to its share price. However, a low price to book could also be an indication of negative forward looking investor confidence (e.g. poor earnings projections) or a disproportionate amount of Intangible assets on the books, depending on which version of the calculation is used (see below section on tangible vs intangible). As such, when used for security analysis, price to book is often coupled with metrics such as P/E, PEG, Return on Equity, and the Current Ratio to get a better snapshot of the company as a whole.

Unsecured Loans are loans that are not backed by collateral. This is in contrast to secured loans, wherein the borrower must pledge some asset (e.g. real estate, personal property, investment securities) to the lender should he default on the loan.

Unsecured loans are sometimes called "signature loans" because the bank has nothing but your signature. If the borrower goes into default they cannot posses any of your belongings; rather, they can report you to credit reporting companies and taint your credit.

Typically, unsecured loans are issued on the basis of the borrower's credit rating, though it should be noted that all loans lacking a collateral pledge (including informal loans between friends) are technically unsecured loans. For borrowers who don't have any collateral to pledge, these unsecured loans may seem attractive. However, since there is an increased risk for the bank, most of the times the interest rates are higher.

Commercial Paper is a notable unsecured loan.