The global economy has been thrashed for the last year by the financial crisis. Here are some of the most important terms to know to understand the scope of the crisis.
Assets: Things that have earning power or some other value to their owner.
Fixed assets (also known as long-term assets) are things that have a useful life of more than one year, for example buildings and machinery; there are also intangible fixed assets, like the good reputation of a company or brand.
Current assets are the things that can easily be turned into cash and are expected to be sold or used up in the near future.
Asset backed securities (ABS): A debt security backed by assets such as loans, credit card debt, royalties and so on. As commonly used the term excludes mortgage backed securities, although they are essentially a type of asset backed security.
Administration: A rescue mechanism for companies in severe trouble. It allows them to continue as a going concern, under supervision, effectively to try to trade out of difficulty. A firm in administration cannot be wound up without permission from a court.
Basis point: One one-hundredth of one percentage point. Changes in interest rates are measured in basis points. If the Federal Reserve's target rate was 2 percent and it was cut by 50 basis points, the new rate would be 1.5 percent.
Bear Market: In a bear market, prices are falling and investors, anticipating losses, tend to sell. This can create a self-sustaining downward spiral.
Bond: A debt security – rather like an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. Banks and investors buy and trade bonds.
Bull Market: A bull market is one in which prices are generally rising and investor confidence is high.
Capital: The wealth - cash or other assets - used to fuel the creation of more wealth. Within companies, often divided into working capital or fixed capital.
Capitulation: Used of the stock markets, the point when a flurry of panic selling induces a bottoming out of prices.
Carry trade (currency): Borrowing money in a currency with a low interest rate, and converting it into a currency with a higher interest rate and then lending it. In recent years a common form investment strategy was the “yen carry trade” - borrowing yen at Japan’s very low interest rates and converting them to buy, for example, US Treasury Bonds. The element of risk is in the fluctuations in the currency market.
Chapter 11: The term for bankruptcy protection in the US. It postpones a company's obligations to its creditors, giving it time to reorganize its debts or sell parts of the business, for example.
Collateralized debt obligation: A type of asset backed security in which debt, including bonds or mortgages are pooled, sliced up and resold to investors. In theory, CDOs attract a stronger credit rating than individual assets due to the risk being diversified. In the current crisis as US home owners defaulted on mortgages and house prices fell, the value of many CDOs collapsed.
Commercial paper: Short-term loans, issued primarily by corporations, to finance their daily needs, such as making payroll. Historically, a lower-cost alternative to bank loans.
Correction: A short-term drop in stock market prices. The term comes from the notion that, when this happens, overpriced stocks are returning back to their "correct" values.
Credit Default Swap (CDS): A kind of insurance policy against defaults. Buying a CDS allows, for example, a bank to make regular payments to a third party in return for compensation in case of default on a loan. But CDS can also be bought and sold by institutions not party to the underlying loan, and in this way they became major speculative vehicles. Warren Buffet once described them as “financial weapons of mass destruction.”
Credit crunch: A sudden reduction in the availability of credit. In the current crisis the reluctance of banks to lend money to each other for fear of default or bankruptcy, in turn meant less money available to loan to companies and individuals.
