Glossary j - moneymanager.com.au

Immunisation
The design of a portfolio to achieve a target level of return in the face of changing reinvestment rates and price levels. This is done by combining short- and long-term bonds in the same portfolio to produce a predictable rate of return regardless of movements in interest rates.

Implied Volatility
The level of volatility in the price of an underlying asset which is assumed for the purpose of calculating a price of an option based on that asset.

Imputation Credit
Taxation credits which are passed onto shareholders who have received franked dividends in relation to their shareholdings. (See also Dividend Imputation).

IMRO
Abbreviation for Investment Management Regulatory Organisation.

Income Portfolio
A portfolio consisting of securities whose principal attractiveness lies in the steady income they provide.

Income Tax Assessment Act (ITAA)
The Commonwealth legislation governing income tax, payable by Australian taxpayers.

Incorporation
The legal process by which a company is established.

Indemnity
A legal agreement under which one party agrees to pay for losses incurred by another. (See also Guarantee).

Index
a) (Noun) A numerical measure of price movement in financial markets; or b) (Verb) To adjust a variable by a selected measure such as the CPI.

Index Arbitrage
The practice of exploiting the difference between a derivatives market and its physical market equivalent by selling one and buying the other. Sometimes also referred to as Program Trading. (See also Basis Risk).

Indexation
A means of adjusting the level of wages, prices, etc. by linking them to a selected measure, such as the level of inflation.

Indexed Annuity Bond (IAB)
A form of indexed bond which provides a steadily-increasing stream of principal and interest payments to the holder, with a cashflow structure similar to that of a conventional mortgage. (See also Capital-Indexed Bonds).

Indexed Bonds
Bonds which are issued with an interest rate or maturity value which is indexed to inflation rather than being fixed when the bond is issued. The most common varieties are Capital-Indexed Bonds and Indexed Annuity Bonds.

Index Fund
A portfolio of securities structured in such a way that its value will closely follow a nominated market index, eg. an equity index fund may be designed to track the All Ordinaries Index. There are three main methods in use: a) Replication, which involves buying every security in the Index in the correct proportion; b) Stratified sampling, which selects a sample of stocks according to simple criteria, such as size and industry grouping, to achieve an approximate tracking at lower administrative cost; and c) Optimised sampling, which uses a more sophisticated statistical approach involving a risk-matching process to design the best sample of stocks for any particular desired level of tracking accuracy. A fund structured by this method is known as an optimised index fund. Index funds can be designed for equities (domestic or overseas), bonds, or property trusts.

Indicator
A signal or statistic used to predict the value (or movement in the value) of another variable. For example, change in Average Weekly Earnings might be an indicator of a movement in the inflation rate.

Indirect Quotation
An exchange rate quotation in which the local currency is the base currency and the foreign currency is the terms currency, eg. GBP/USD in the United Kingdom. (See also Direct Quotation).

Individual Portfolio
A portfolio of investments managed on behalf of a single organisation or individual, as opposed to a pooled investment vehicle. Individual portfolios are generally only made available by professional investment managers to clients with several million dollars to invest.

Industrial Relations Commission (IRC)
The Federal Government organisation responsible for the prevention, conciliation and arbitration of industrial disputes, in particular disputes related to federal awards.

Industrial Shares
Shares of companies engaged in the production or sale of goods or services, as distinct from resource or mining companies. Industrials make up about two thirds of the Australian sharemarket by market capitalisation. (Resource shares make up the other third). These industrial shares are classified as the Industrial Sector in the All Ordinaries Index.

Industry Fund
A superannuation fund which is industry or union-based. Industry funds commenced general operation in 1987 following the incorporation of superannuation entitlements into many industry awards, although the Seafaring, Stevedoring, Storemen and Pulp and Paper industries have long-standing industry superannuation funds. Examples of industry funds are C+BUS (for Building Unions and the Construction Industry), HESTA (for the Health industry) and REST (Retail Employees' Superannuation Trust). (See also Award Superannuation).

Inflation
An increase in the level of prices of goods and services in the economy. It is typically measured by examining a basket of goods and services (eg. by the Consumer Price Index). (See also Headline Inflation and Underlying Inflation).

Inflation Hedge
A type of investment whose value can be expected to increase in a time of rising inflation. Indexed bonds are considered a good inflation hedge over the long term.

Information Ratio
A statistical ratio of a variable against a standard deviation. In relation to managed investments, information ratios are most often used to measure a manager's performance in terms of both risk and return relative to a benchmark or other measure (eg. the inflation rate).

Infrastructure
A general term for facilities and services required by the community and for production (eg. transport power, roads, telecommunications, water supply).

Infrastructure Bonds
A form of security supported by taxation concessions from the Australian Government, with the aim of encouraging private funding of public infrastrucutre projects in the areas of land transport, airports, seaports, gas pipelines, water supply, sewerage or waste water installations and electricity generation. Interest payments on eligible infrastructure bonds are not tax-assessable to the bondholder or deductible to the issuer and, since amendments in 1994, can also provide a tax rebate to investors on low taxation rates, such as superannutation funds. Investors can use the bond interest rebate to reduce their overall tax liability from other investments. They are administered by the Development Allowance Authority, which refers to them by the marketing term Develop Australia Bonds.

In House
Referring to an activity which is conducted within an organisation rather than contracted out to an external party. In relation to superannuation funds, the term is also used to distinguish assets which are invested directly by the employer or the trustees from those that are managed externally. Under the SIS Legislation, trustees of regulated superannuation funds are restricted to holding 5% or less of their investments in `in house' assets.

Initial Public Offering (IPO)
The first sale of shares of a company to the public.

Initiation Date
The date on which an option contract is entered into.

Inscribed Stock
A type of stock whose ownership details are recorded in a central registry, with the owner holding a certificate which is not itself transferable. Opposite of a bearer security.

Insider Trading
The illegal practice of trading in securities on the basis of `inside' or secret information which is not available to the public at large.

Insolvency
The inability of a corporation to pay debts as they fall due owing to an excess of liabilities over assets.

Institute of Actuaries of Australia
A professional association for actuaries which provides training for members and promotes the discussion of actuarial issues within the industry and in the wider commercial community. The Institute also aims to foster and support the ongoing development of actuarial science in Australia and throughout the Asia-Pacific region.

Institute of Chartered Accountants in Australia
A professional organisation formed in 1928, representing mainly accountants in practices. The institute is jointly responsible, with the Australian Society of Certified Practising Accountants (ASCPA), for the formulation and issuing of the accounting standards through the Australia Accounting Research Foundation (AARF).

Institutional Investor
An organisation whose primary purpose in investment markets is to invest its own assets or those held in trust by it for others. Includes superannuation funds, life companies, universities, banks, etc. Institutional investing has an ever increasing impact on securities trading. (See also Australian Investment Managers? Association).

Insurance
A contractual arrangement under which one party (the insurer) agrees to pay an amount of money to another (the policy holder) on the occurrence of a defined event, in return for payment of a premium (eg. life, disability, professional indemnity).

Insurance and Superannuation Commission (ISC)
The Commonwealth Government body with the main responsibility for regulation of the insurance and superannuation industries. Under the SIS Legislation the ISC assumes responsibility for certain aspects of superannuation regulation formerly conducted by the Australian Securities Commission (eg. disclosure requirements for public offer funds).

Insurance Bond
An investment product issued by life insurance companies which, if held for ten years or more, is not subject to further taxation on its final proceeds. An insurance bond policy does not necessarily include any life insurance cover for its holder. (See also Friendly Society Bond).

Insurance Council of Australia (ICA)
An industry association established in 1975, representing general insurers in Australia. The main role of the ICA is to promote discussion of industry issues, lobby government and promote the industry to the community. (See also Life Investment and Superannuation Association).

Intangible Assets
See Assets.

Interest
The return earned on funds which have been loaned or invested (ie. the amount a borrower pays to a lender for the use of his/her money). (See also Compound Interest and Simple Interest).

Interest Assumption
The expected rate of investment return (for actuarial purposes) on a superannuation scheme or other investment portfolio.

Interest Coverage
A measure of a company's ability to meet its interest obligations, calculated by dividing interest payments into income. The higher the ratio the better.

Interest Rate Cycle
A business cycle concerned specifically with the rise and fall of interest rates. Using historic interest rate cycles and other economic indicators, business analysts attempt to construct yield curve forecasts.

Interest Rate Futures
A transferable agreement to make or take delivery of a fixed-interest security at a specific time, under terms and conditions established by a market upon which futures trading is conducted. The Sydney Futures Exchange offers interest rate futures contracts in 10 year and 3 year Government bonds, and in bank bills.

Interest-Rate Risk
The risk borne by fixed-interest securities, and by borrowers with floating rate loans, when interest rates fluctuate. When interest rates rise, the market value of fixed-interest securities declines and vice versa.

Interest Rate Sensitivity
The degree of movement in the price of a security, usually that of a bond, resulting from moves in interest rates. (See also Duration).

Interest Rate Swap
See Swap.

Internal Audit
An <169>in-house<170>audit of an organisation's records, procedures or systems. Unlike external audits, internal audits are normally conducted by the organisation's own employees or specialists it engages for the task. Their typical aims are to prevent fraud within the organisation and ensure that Board policies are being fully complied with.

Internal Rate of Return (IRR)
The rate of discount which needs to be applied to make the net present value of an investment equal to the price paid.

International Monetary Fund (IMF)
An international organisation founded in 1947 to promote maintenance of equilibrium in the balance of payments among the various nations of the world. The functions of the IMF include the levying of quotas on member nations to create a pool of funds available to be loaned to nations facing balance of payments problems.

International Organisation of Securities Commissions
(IOSCO)<_>An association of securities commissions and stock exchanges that aims to enhance regulation of financial markets, on a domestic as well as international level, through cooperation and information exchange. IOSCO was established in 1987 with its head office in Montreal, Canada. As at April 1996, IOSCO had 120 member agencies (73 voting, 10 associate and 37 affiliate) from 78 countries. The Australian Securities Commission and Australian Stock Exchange are members of IOSCO.

Internet
A global electronic communication network of linked computer servers. At present, it is used mainly to exchange electronic mail and to access the Worldwide Web, the Internet library of home pages. Although local access to the Internet is heavily influenced by universities and telecommunications companies, there is no global governing agency. As such, there is currently no way of guaranteeing the confidentiality of information exchanged, a major impediment to wider use of the Internet in the finance industry.

In-the-Money Option
A call option whose exercise price is below, or a put option whose exercise price is above, the current price of the asset on which the option is written.

Intrinsic Value
a) The actual money value which an object possesses in itself (ie. its value in relation to unsatisfied demand). As applied to securities, intrinsic value is the basic worth of a corporation, as calculated by its past record and potential earning power; b) In relation to a call (put) option, the amount by which the exercise price is less (more) than the market price. It is the value of an option if it is exercised immediately.

Inverted Market
In relation to futures trading, a market in which prices for distant futures are below the prices of the nearer futures. (See also Backwardation).

Invest Australia
See Development Allowance Authority.

Investible
Capable of being invested. When comparing investment returns against a benchmark, it is preferable that the benchmark be an investible one in order that realistic comparisons can be made between actual and benchmark performance.

Investment
An asset acquired for the purpose of producing income and/or capital gains for its owner.

Investment Analyst
A financial expert trained to analyse the activities and future prospects and earnings of companies and securities for the purpose of investment.

Investment Environment
The general economic, political, legal and market conditions within which an investment is made.

Investment Fluctuation Reserve
A pool of reserves kept within a superannuation fund, created by retaining a proportion of returns when returns are high, to be utilised to supplement payments to members when returns are low. This allows member payments to be more consistent. (See also Smoothing).

Investment Funds Association of Australia (IFA)
An industry association established in 1985 representing retail investment managers. The main role of the association is to educate members and the wider community, compile industry statistics, establish practice standards and make representations to Government on issues affecting the interests of the managed funds industry.

Investment Grade Bonds
Bonds which have a credit rating which is sufficient for them to be purchased by most institutional investors (particularly those whose investments are regulated).

InvestmentLink
A communications network that enables financial advisers to electronically access up to date, consolidated information in a central database of all their clients' investments, provided by participating investment product suppliers. The information includes details of client transactions, balances, fund rates, and the investment products.

Investment-linked
A term used to describe insurance bonds or other financial products whose returns are measured in terms of unit prices, based on the market values of the underlying assets. The term is particularly used as a term of distinction from capital-guaranteed products, the returns from which are determined by the life insurance company sponsoring them. (See also Market-linked).

Investment Management Agreement (IMA)
A contractual agreement between an investor and an investment manager stating the terms and conditions applying to management of the stated assets. For the superannuation industry, the SIS Legislation requires that Investment Management Agreements be made in writing, and that they include provisions that the manager provide appropriate information as to its investment returns and management process, and sufficient information to enable the trustees to assess the manager's capabilities to manage their investments.

Investment Management Regulatory Organisation (IMRO)
A regulatory organisation for the investment management industry in the United Kingdom.

Investment Manager
An organisation that specialises in the investment of a portfolio of securities on behalf of individuals and/or organisations subject to the guidelines and directions of the investor. Investment managers offer both pooled investment products and individual portfolios to a range of clients including superannuation funds, institutions and individual investors.

Investment Mix
See Asset Allocation.

Investment Philosophy
The set of principles or systems used by investors to govern the way they manage portfolios. Sometimes confused with investment style, which tends more to be associated with the level of risk in the portfolio.

Investor
A person whose principal purpose is to invest money prudently and productively over the longer term with the investment objectives being achievement of a reasonable return and capital appreciation to preserve purchasing power. The opposite of a Speculator, who will sacrifice safety of principal for the possibility of larger gains.