Investment Glossary

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Imputation Credit

Tax credits associated with dividends from companies or unit trusts that have already paid tax on earnings. These credits can be used by NZ resident shareholders to reduce their total tax liability. Investors with a tax rate that is less than the company rate can use the excess tax credits against other income which may result in a tax refund.

Income fund

an investment fund, the main objective of which is to achieve income for its investors. Thus, it tends to select securities such as bonds, mortgages and sometimes preference shares, and shares that pay relatively high dividends.

Index fund

an investment fund that keeps a portfolio of securities designed to match the performance of a market as a whole. For example a market represented by an index such as Standard & Poor's 500. An index fund has low administrative expenses; it appeals to investors who believe it is difficult or impossible for investment managers to beat the market. - Also called a passive fund.

Index option

a call option or put option with a specific index as the underlying asset. For example, a call option on the Standard & Poor's 500 Index gives the option buyer the right to purchase the value of the index at a fixed price until a predetermined date. Index options provide a means to leverage a view on the future direction of the market or a particular industry segment without purchasing all the individual securities. Options can be used to enhance returns by reducing potential downside, increasing potential upside or increasing portfolio revenue through premium income. - See also hedging

Indexa dat

a data series which reflects the change in value of an underlying variable or aggregate variables. For example security price indicators such as the Standard & Poor's series and the New Zealand Stock Exchange (NZSE) series. Also called share indices. Another common index is the consumer price index (CPI) which measures the change of value in a 'basket' of common and regularly purchased consumer goods and services.

Inflation

a general increase in the price level of goods and services. Unexpected inflation tends to be detrimental to security prices, primarily because it forces interest rates higher. A point to keep in mind is that a certain amount of inflation expectation is already embodied in security prices. See also Consumer Price Index

Initial public offering (IPO)

a company's first sale of shares to the public. Securities offered in an IPO are often but not always those of young, small companies seeking public equity capital and a market for their shares.

Insider

a person who, because of his or her position within a firm, has access to proprietary information unavailable to the general public. Although the term insider obviously includes corporate officers, it also may extend to relatives of these officers or to employees of other firms having a special relationship with the firm in question.

Insider trading

the (illegal) buying or selling of securities on the basis of information that is generally unavailable to the public. An example is the purchase by a director of shares of his or her firm's shares just before the release of surprisingly good earnings information.

Insolvent

unable to meet interest payments on debts or liabilities. Liabilities exceed assets.

Instalment

a partial payment on a financial obligation. For example, an annual or monthly payment to the seller of a farm (or any other asset) on a long-term contract is an instalment. If all the instalments are of equal size, each subsequent payment incorporates an increasing amount of principal and a decreasing amount of interest.

Interest

Periodic payment made by a borrower to lender. Often expressed as a percentage of the amount lent. See also coupon

Interest rate risk

the risk that interest rates will rise and reduce the market value of an investment. Long-term fixed-income securities, such as bonds and preference shares, subject their owners to the greatest amount of interest rate risk. The price of short-term securities, such as Treasury bills, are influenced much less by interest rate movements. Share prices are also affected by changes in interest rates although the linkage is less clear than is the case with debt securities and preference shares.

Interim dividend

a dividend declared before a firm's annual earnings and dividend-paying ability are accurately known by its management. An interim dividend is ordinarily paid at the end of the first half of the fiscal year. This payment is followed by a final dividend at the time that earnings can be accurately determined. Some companies pay dividends quarterly.

Intermediary

generic name for a broker, financial planner, investment or insurance adviser. Anyone who sells financial products or services as agent for the issuer or other party. See also Intermediation.

Intermediation

the flow of funds through financial intermediaries (banks, finance companies, etc) on the way to the ultimate borrowers. Money deposited at financial institutions that make the money available to corporate borrowers is an example of intermediation. Other forms of intermediation include the sale of investments through brokers and advisors.

Internal rate of return (IRR)

the rate of discount on an investment at which the present value of the investment's cash outflows is equal to present value of the investment's cash inflows. Internal rate of return is also the yield-to-maturity for a bond. It therefore provides a means of comparing returns on a similar basis for different investment types or portfolios. See also Discounted Cash Flow

Investment statement

the key investment offer document required (by New Zealand law) to be made available to prospective investors prior to subscribing for securities offered therein. By law it must contain the answers to prescribed questions which will enable a 'prudent but non-expert investor' to make an investment decision. See also Prospectus

Investment-grade

generally regarded as those bonds graded BBB and above by rating agencies such as Standard and Poors and Moodys.

Issuer

Company which raises capital by issuing debt (borrowing) or issuing shares.

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