Capital Markets Glossary # to D: Plain-English Definitions

About this page

Finance is full of terms that sound simple until you have to use them. This page is a plain-English glossary for Capital Markets, covering entries such as 50 Percent Rule, Account Aggregator, Accredited investor, Accretive / dilutive, Accruals ratio, each with a short definition and a pointer to the part of the volume where it is explained.

Keep it open while you read, or use it to settle an argument about what a term really means. Every entry is written to stand on its own, with no jargon left undefined, and the part number beside it tells you where to read more. Use it as a quick reference whenever a term trips you up.

A sample of the entries (92 terms on the full page)

50 Percent Rule — OFAC’s rule that an entity owned 50% or more, in aggregate, by blocked persons is itself blocked, whether or not it is listed (Part 9.3).

Accruals ratio — Net income minus operating cash flow, scaled by total or average assets; high values mean profit is running ahead of cash (Part 6.7).

Additional Tier 1 (AT1) capital — Perpetual bonds that count as bank regulatory capital because they can skip coupons and be written down or converted into shares when capital falls below a trigger or the bank is declared non-viable (Part 10.9).

Annual percentage yield (APY) — The annualized deposit rate, including compounding, that US banks must disclose under Regulation DD, calculated on a 365-day basis.

Backtesting — Comparing actual daily losses with the VaR forecast for each day and counting exceptions; a correct 99% model shows about 2.5 per 250 days (Part 5.6).

Bargain purchase — An acquisition in which identifiable net assets at fair value exceed the price; after rechecking the valuations, the acquirer books the difference as a gain (Part 6.4).

Beta-adjusted net exposure — Longs times their beta minus shorts times their beta, as a percentage of capital; a better measure of market risk than dollar net exposure (Part 8.2).

Bootstrapping — Solving for spot rates one maturity at a time from coupon bond prices, using each discount factor already found to price the next bond’s earlier coupons (Part 3.4).

Buy now, pay later (BNPL) — Point-of-sale installment credit, often four interest-free payments, funded mainly by fees charged to the merchant (Part 11.8).

Capital Market Line — The straight line of portfolios mixing the risk-free asset with the tangency portfolio: E(Rp) = Rf + [(E(RT) − Rf) ÷ σT] × σp (Part 5.3).

Cash sweep — A loan term requiring the borrower to use some or all of its excess free cash flow to prepay debt (Part 2.7).

Circuit breakers — Exchange-wide trading halts triggered by large index falls; US halts trigger at 7%, 13% and 20% falls in the S&P 500, India’s at 10%, 15% and 20% moves in the Sensex or Nifty (Part 10.8).

Closet indexer — A fund that charges active-management fees while holding a portfolio close to its benchmark, so most of the fee buys index exposure (Part 5.3).

Compensation clawback — Recovery of incentive pay that restated financial results would not have earned; mandatory for NYSE- and Nasdaq-listed companies on a no-fault basis for pay received from October 2, 2023, under SEC Rule 10D-1 (Part 7.4).

Contango — A futures curve in which futures trade above spot and longer maturities cost more, typical for assets with financing and storage costs such as gold. (Part 4.1)

Controlled company — A listed company in which one person, group or company holds more than 50% of the voting power for electing directors; US exchanges exempt it from majority-independent board and independent pay and nominating committee rules, but not from the independent audit committee (Part 7.1).

Correlation — Covariance divided by the product of the two standard deviations, giving a unit-free number ρ between −1 and +1; the input that determines how much diversification reduces portfolio risk.

Covenant cushion — How far EBITDA can fall before a leverage covenant is breached: 1 − (debt ÷ covenant maximum) ÷ EBITDA.

Credit event — A default trigger defined in a CDS contract, such as bankruptcy, failure to pay or a qualifying restructuring, determined by an ISDA committee. (Part 4.7)

Cross-currency basis — The persistent deviation of market currency forwards and swaps from covered interest parity since 2008, linked to the cost of bank balance sheets. (Part 4.6)

Day-count convention — The rule fixing how many days of interest accrue and how long a year is, such as actual/360 for SOFR or 30/360 for US municipal bonds.

Delta hedge — Holding delta units of the underlying against each option so that small price moves leave the combined position unchanged. (Part 4.3)