Glossary of Financial Terms
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T-bill
A T-bill is issued by the federal government as a short-term security to raise funds. T-bills are auctioned to major commercial banks (e.g., Royal Bank, CIBC, and TD), which thereby sell them to individual investors. T-bills are normally sold in discount. For example, if you purchase a $10,000 T-bill with a year to maturity at an interest rate of 10%, then you now have to pay 10,000/(1+0.1)=$9090.91 to get the bill. One year from now, you get back $10,000. Typically, T-bills are sold with time to maturity of one, three, six, or twelve months.
Takeover
It also means acquisition.
Please see “Mergers and Acquisitions (M&A).” Also see “Poison Pill” and “Golden Parachute.”
Tax-Free Savings Account (TFSA)
A savings plan that came into effect on January 1, 2009. It is essentially a vehicle used to encourage Canadians to save. Under this plan, a Canadian resident can contribute up to $5,500 per year to earn tax-free investment income. The contribution itself is after-tax, so only the investment income is free of tax. In this aspect, it is quite different from RRSP. Withdrawals from a TFSA are tax-free and can be put back to the plan at any time. Any unused portion of the annual contribution limit can be accumulated and carried forward. Much like a spousal RRSP, contributions can also be made under the name of a spouse or common-law partner. For instance, if Simon’s wife Sarah has no income, then he can contribute $11,000 per year, out of which $5,500 is under his own name while the other $5,500 under Sarah’s name.
See “RRSP.”
Technical Analysis
A type of stock analysis which ultimate goal is determining where the stock price is going. Unlike “fundamental analysis,” technical analysis is not preoccupied with fundamentals. In the case of technical analysis, efforts are directed at detecting trading patterns so that the price movements in the immediate future can be predicted. Needless to say, past prices and trading volume are the main targets of investigation. The regular metrics being looked at include such things as moving average of past prices, support level, and resistance level. Comparing the current stock price with a, say 250-day, moving average might suggest the overall direction of the price movement. A resistance level is a price that the stock has repeatedly reached in the recent past but failed to pass through. If one day the stock price breaks through this level, then it will indicate the start of an upward momentum, hence qualifies as a buy signal. The support level is the just the opposite: if the stock price flirt with a low level several times and ultimately dips through it, then it is time to sell.
Understandably, those who rely on technical analysis don’t believe in market efficiency, especially the so-called weak-form market efficiency.
Also see “Fundamental Analysis” and “Market Efficiency.”
Term Structure of Interest Rates
The curve that relates spot interest rates to maturities. For instance, we have a series of Government of Canada strip bonds with maturities of 1-, 2-, 3-, 4-, and 5-years. Suppose that the return or yield on each bond is 4.00%, 4.25%, 4.55%, 5.00%, and 5.50%, respectively. If we plot the yields on the maturities, we will find an upward sloping curve. This particular curve is called term structure of interest rates. It is a functional concept because once we have this curve, we can value any coupon bonds by doing simple cash flow discounting.
Also see “Discount Bond,” “Spot Interest Rates,” and “Strip Bond.”
Total Return Swap
First look up “Swap” and “Equity Swap.” In nature, it is the same as an equity swap in that it allows one party to receive the actual total return on an asset without directly acquiring it. However, total return swaps are usually classified under credit derivatives since the underlying asset is typically a bond or a loan. Suppose CDE Pension Plan has the intention enhance its returns by investing in corporate bonds issued by WhiteBerry Inc. Instead of going out and directly acquiring WhiteBerry’s bonds, ABC Pension Plan can enter into a total return swap with, say, a four-year tenure whereby each year, ABC will pay LIBOR in addition to a spread and receive a pre- determined fixed rate commensurate with the credit risk of WhiteBerry − i.e., a rate equivalent to the yield on WhiteBerry’s bonds. At the swap’s maturity, a one-time payment is done to reflect the gain or loss on the bond price. For instance, if the market interest rate slowly declines throughout the life of the swap, then there will be capital gain on the bond, and ABC Pension Plan will be paid the net-gain amount prior to the closing of the swap. Therefore, ABC would have received the total return on WhiteBerry’s bonds. Thus, the name “total return swap.”
An acute reader may now realize that a total return swap is basically a financing vehicle. In other words, the exact equivalent of borrowing funds (by paying an interest rate equal to LIBOR plus a spread) and investing in bonds.
See “Bond” and “LIBOR.”
See also “Commodity Swap,” “CDS (Credit Default Swap),” “Asset Swap” and “Credit Derivatives.”
Treasury Bonds
It is a long-term debt normally issued by the federal government. Treasury bonds are not similar to T-bills in that they have a longer maturity (usually longer than 10 years at issue) and carry coupons.
Please see “T-bills.”
Treasury Stock
Treasury stock is a common stock that has been repurchased by the company and held in the company’s treasury. These shares don’t typically pay dividends, have no voting rights, and are not part of the total number of shares outstanding. However, these shares are still counted as part of shares issued.
See also “Stock Repurchase.”
TSX
The shorter version of “Toronto Stock Exchange.” TSX is a formal exchange with a physical location. Companies that list shares on the TSX must meet certain requirements regarding such things as the number of shares outstanding and market capitalization. The vast majority of listing companies on the TSX are Canadian.
See also “Market Capitalization,” “Nasdaq,” “Over-the-Counter Market” and “NYSE.”
Tulipmania
It refers to a tulip trading frenzy in the Netherlands that occurred in the mid-17th century. Primarily, the event was a display of vanity, greed and madness. The story is often told to illustrate how investors could easily create a bubble and then witness its subsequent burst.
Tulips were introduced in Europe from Turkey in the mid-1500s (in fact, the word “tulip” is known to have originated from the Turkish word “turban”). Much like other novel things which tend to be first owned, proudly, by people in high societies, tulips soon became a status symbol in the Netherlands. Hobby horticulturists and entrepreneur-spirited people began to take advantage of the status-craving by cultivating and selling tulip bulbs in the spring. By the early part of 1630s, tulips had become a must-have and as a status symbol for wealthy individuals. The absence of tulips in the garden would be equivalent to the absence of a luxury car on the driveway of a modern-day well-to-do family. But the craving for such status didn’t stop with the rich. Ordinary folks started to want them too. A trader in Haarlem reportedly spent half of his life savings to acquire a single tulip bulb simply for show and not for profit. Most definitely, that bulb must have been of a rare variety. Indeed, the trading prices of bulbs primarily depended on how rare and exotic the tulips were.
People were so enthused when trading was no longer confined to the spring season. Folks in bars, taverns and other gathering places began trading in the winter when the bulbs were still buried frozen in the ground. They traded bulbs by signing promissory notes: promises of delivery of tulip bulbs in the spring. Not long after, the promissory notes themselves were being traded for profits. In other words, in the later stage of the mania, people were not even concerned of what species of tulips were specified in the contracts; they were only interested in how much profit they could make when they sell the promissory notes to the next fool. (Contrary to many accounts, tulip bulbs were not once traded on formal exchanged such as the Amsterdam Stock Exchange.)
Peak prices of tulip bulbs (of various varieties) were reached at the end of 1636 and the beginning of 1637. According to several different estimates, in today’s U.S. dollar terms, a single bulb of a fancy variety fetched a price anywhere from $17,000 U.S. to $76,000 U.S. (that would be such an expensive onion to eat if the tulip bulb were mistaken as one!). It took only a few weeks for the tulip bubble to completely burst. After all the dusts has settled, the price dropped all the way to merely a dollar per bulb in today’s terms.
Do you think people learned a lesson from the Tulipmania?