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Interest rate floor An interest rate agreement in which payments are made when the reference rate falls
below the strike rate.

Interest rate on debt The firm's cost of debt capital.
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Interest rate parity theorem Interest rate differential between two countries is equal to the difference
between the forward foreign exchange rate and the spot rate.

Interest rate risk The risk that a security's value changes due to a change in interest rates. For example, a
bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that
spread income will suffer because of a change in interest rates.

Interest rate swap A binding agreement between counterparties to exchange periodic interest payments on
some predetermined dollar principal, which is called the notional principal amount. For example, one party
will pay fixed and receive variable.

Interest subsidy A firm's deduction of the interest payments on its debt from its earnings before it calculates
its tax bill under current tax law.

Interest tax shield The reduction in income taxes that results from the tax-deductibility of interest payments.

Intermarket sector spread The spread between the interest rate offered in two sectors of the bond market for
issues of the same maturity.

Intermarket spread swaps An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.

Intermediate-term Typically 1-10 years.

Intermediation Investment through a financial institution. Related: disintermediation.

Internal finance Finance generated within a firm by retained earnings and depreciation.

Internal growth rate Maximum rate a firm can expand without outside source of funding. Growth generated
by cash flows retained by company.

Internal market The mechanisms for issuing and trading securities within a nation, including its domestic
market and foreign market. Compare: external market.

Internal measure The number of days that a firm can finance operations without additional cash income.

Internal rate of return Dollar-weighted rate of return. Discount rate at which net present value (NPV)
investment is zero. The rate at which a bond's future cash flows, discounted back to today, equals its price.

Internally efficient market Operationally efficient market.

International Bank for Reconstruction and Development - IBRD or World Bank International Bank for
Reconstruction and Development makes loans at nearly conventional terms to countries for projects of high
economic priority.

International Banking Facility (IBF) International Banking Facility. A branch that an American bank
establishes in the United States to do Eurocurrency business.

International bonds A collective term that refers to global bonds, Eurobonds, and foreign bonds.

International Depository Receipt (IDR) A receipt issued by a bank as evidence of ownership of one or more
shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR
structure is that the corporation does not have to comply with all the regulatory issuing requirements of the
foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depository
Receipt (ADR).
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International diversification The attempt to reduce risk by investing in the more than one nation. By
diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce
the variability of their returns.

International finance subsidiary A subsidiary incorporated in the U.S., usually in Delaware, whose sole
purpose was to issue debentures overseas and invest the proceeds in foreign operations, with the interest paid
to foreign bondholders not subject to U.S. withholding tax. The elimination of the corporate withholding tax
has ended the need for this type of subsidiary.

International Fisher effect States that the interest rate differential between two countries should be an
unbiased predictor of the future change in the spot rate.

International fund A mutual fund that can invest only outside the United States.

International market Related: See external market.

International Monetary Fund An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.

International Monetary Market (IMM) A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

In-the-money A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money
by $0.50 an ounce. Related: put.

Intramarket sector spread The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.

Intrinsic value of an option The amount by which an option is in-the-money. An option which is not in-the-
money has no intrinsic value. Related: in-the-money.

Intrinsic value of a firm The present value of a firm's expected future net cash flows discounted by the
required rate of return.

Inventory For companies: Raw materials, items available for sale or in the process of being made ready for
sale. They can be individually valued by several different means, including cost or current market value, and
collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude
overstating earnings and assets. For security firms: securities bought and held by a broker or dealer for resale.

Inventory loan A secured short-term loan to purchase inventory. The three basic forms are a blanket
inventory lien, a trust receipt, and field warehousing financing.

Inventory turnover The ratio of annual sales to average inventory which measures the speed that inventory
is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.

Inverse floating rate note A variable rate security whose coupon rate increases as a benchmark interest rate
declines.

Inverted market A futures market in which the nearer months are selling at price premiums to the more
distant months. Related: premium.

Investment analysts Related: financial analysts
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Investment bank Financial intermediaries who perform a variety of services, including aiding in the sale of
securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and
institutional clients, and trading for their own accounts. Underwriters.

Investment decisions Decisions concerning the asset side of a firm's balance sheet, such as the decision to
offer a new product.

Investment grade bonds A bond that is assigned a rating in the top four categories by commercial credit
rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys'
classifies investment grade bonds as Ba or higher. Related: High-yield bond.

Investment income The revenue from a portfolio of invested assets.

Investment management Also called portfolio management and money management, the process of
managing money.

Investment manager Also called a portfolio manager and money manager, the individual who manages a
portfolio of investments.

Investment product line (IPML) The line of required returns for investment projects as a function of beta
(nondiversifiable risk).

Investment tax credit Proportion of new capital investment that can be used to reduce a company's tax bill
(abolished in 1986).

Investment trust A closed-end fund regulated by the Investment Company Act of 1940. These funds have a
fixed number of shares which are traded on the secondary markets similarly to corporate stocks. The market
price may exceed the net asset value per share, in which case it is considered at a "premium." When the
market price falls below the NAV/share, it is at a "discount." Many closed-end funds are of a specialized
nature, with the portfolio representing a particular industry, country, etc. These funds are usually listed on US
and foreign exchanges.

Investment value Related:straight value.

Investments As a discipline, the study of financial securities, such as stocks and bonds, from the investor's
viewpoint. This area deals with the firm's financing decision, but from the other side of the transaction.

Investor The owner of a financial asset.

Investor fallout In the mortgage pipeline, risk that occurs when the originator commits loan terms to the
borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at
closing.

Investor relations The process by which the corporation communicates with its investors.

Investor's equity The balance of a margin account. Related: buying on margin, initial margin requirement.

Invoice Bill written by a seller of goods or services and submitted to the purchaser.

Invoice billing Billing system in which the invoices are sent off at the time of customer orders are all separate
bills to be paid.

Invoice date Usually the date when goods are shipped. Payment dates are set relative to the invoice date.

Invoice price The price that the buyer of a futures contract must pay the seller when a Treasury Bond is
delivered.
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In-house processing float Refers to the time it takes the receiver of a check to process the payment and
deposit it in a bank for collection.

In-substance defeasance Defeasance whereby debt is removed from the balance sheet but not cancelled.

In the box This means that a dealer has a wire receipt for securities indicating that effective delivery on them
has been made.

Involuntary liquidation preference A premium that must be paid to preferred or preference stockholders if
the issuer of the stock is forced into involuntary liquidation.

IRA/Keogh accounts Special accounts where you can save and invest, and the taxes are deferred until money
is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of
contributions. Withdrawals of tax deferred contributions are taxed as income, including the capital gains from
such accounts.

Irrational call option The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

Irrelevance result The Modigliani and Miller theorem that a firm's capital structure is irrelevant to the firm's
value.

ISDA International Swap Dealers Association. Formed in 1985 to promote uniform practices in the writing,
trading, and settlement of swaps and other derivatives.

ISMA International Security Market Association. ISMA is a Swiss law association located in Zurich that
regroups all the participants on the Eurobond primary and secondary markets. Establishes uniform trading
procedures in the international bond markets.

Issue A particular financial asset.

Issued share capital Total amount of shares that are in issue. Related: outstanding shares.

Issuer An entity that issues a financial asset.

J-curve Theory that says a country's trade deficit will initially worsen after its currency depreciates because
higher prices on foreign imports will more than offset the reduced volume of imports in the short-run.

Jensen index An index that uses the capital asset pricing model to determine whether a money manager
outperformed a market index. The "alpha" of an investment or investment manager.

Joint account An agreement between two or more firms to share risk and financing responsibility in
purchasing or underwriting securities.

Joint clearing members Firms that clear on more than one exchange.

Jumbo loan Loans of $1 billion or more. Or, loans that exceed the statutory size limit eligible for purchase or
securitization by the federal agencies.

Junk bond A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high
yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two
agencies, Standard & Poors and Moody's investor Services, provide the rating systems for companies' credit.

Junior debt (subordinate debt) Debt whose holders have a claim on the firm's assets only after senior
debtholder's claims have been satisfied. Subordinated debt.
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Just-in-time inventory systems Systems that schedule materials/inventory to arrive exactly as they are
needed in the production process.

Kappa The ratio of the dollar price change in the price of an option to a 1% change in the expected price
volatility.

Kiretsu A network of Japanese companies organized around a major bank.

Ladder strategy A bond portfolio strategy in which the portfolio is constructed to have approximately equal
amounts invested in every maturity within a given range.

Lag Payment of a financial obligation later than is expected or required, as in lead and lag. Also, the number
of periods that an independent variable in a regression model is "held back" in order to predict the dependent
variable.

Lag response of prepayments There is typically a lag of about three months between the time the weighted
average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment
speed is observed.

Lambda The ratio of a change in the option price to a small change in the option volatility. It is the partial
derivative of the option price with respect to the option volatility.

Last split After a stock split, the number of shares distributed for each share held and the date of the

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