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Glossary of Accounting, Financial & Investing Information - H & I

A  B  C  D  E  F  G  H-I  J-K-L  M  N  O  P  Q-R  S  T  U-V-W-X-Y-Z

Head of household

You may claim head of household filing status on your tax return if you are unmarried and pay more than 50% of the costs of keeping up a home for yourself and your dependent(s) or other qualifying individuals.

See also qualifying widow(er) filing status.

Hedge fund

A loosely regulated pool of capital which tries to increase returns by using options, futures, leverage, short-selling, restructuring companies, and other means.  These are volatile investments, and the average investor should not invest a large percentage of their assets in these funds.

Hedging

The use of derivatives to lessen risk.

Holding company

A holding company is a private or public corporation which holds some or all of the shares in one or more private or public corporations.

Immediate life annuity

See life annuity

In the money

A call option is in the money when the share price is above the strike price.

A put option is in the money when the share price is below the strike price.

Income statement

An income statement is part of the financial statements of a business.  The income statement reports the net income of the business for a period of time, showing the totals for sales, costs of sales, operating expenses, general and administrative expenses, interest expense, income tax expense, and extraordinary expenses.  The financial statements of a business are normally prepared monthly, although some small businesses or proprietorships may prepare them less often.  Publicly traded corporations normally  publish their financial statements quarterly and annually.

Index

A stock index is a statistical tool which provides the value of a group of securities.   For instance, the Dow Jones Industrial Average is an index which is made up of 30 U.S. industrial companies, and provides a benchmark which reflects the health of the U.S. economy.

Index-linked GIC

This is a GIC which is linked to a stock index, and is usually guaranteed to return all of  your original investment.

Insider

An insider is a director, officer, or large shareholder (more than 10%) who can be presumed to have access to privileged information of the company.

Intangible asset

An asset having no physical substance, such as goodwill, trademarks, and patents.  Note that since 2002, corporations are not required to amortize the cost of their intangible assets every year.  Intangible assets are recorded at cost on the balance sheet.  That cost must be reviewed annually to determine if its current value is less than cost, in which case the value would be written down on the balance sheet.  Due to this change in accounting rules,  corporate net earnings will likely be increased over prior years, as will earnings per share.

Interest coverage

Also called times interest earned, interest coverage reflects the ability of the company to pay its interest.  It is calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense.  If the result of this calculation is 2, it means that the company's operating earnings are 2x its interest expense.

Interest rate sensitive

When an investment is interest rate sensitive, its value will fall as interest rates rise.  Most stocks are interest rate sensitive, but some, like financials and utilities, are more sensitive than others, such as consumer stocks and commodities.

Interest rates

The nominal rate is the annual interest rate before adjusting for the effect of compounding.  When an interest rate is stated with its compounding frequency (e.g. 6% compounded monthly), the stated rate is the nominal rate.

The effective rate is the annual interest rate after adjusting for the effect of compounding.  It is also known as the annual percentage yield, or APY.  The APY is usually used when comparing rates on deposit accounts or investment products.  The calculation of the APY is regulated by the Federal Deposit Insurance Corporation (FDIC).  See the FDIC website information on the APY calculation.

The APR, or annual percentage rate, is used to compare interest rates on loans and credit cards.  The calculation of the APR is regulated by the Federal Deposit Insurance Corporation (FDIC).  See the FDIC website information on the APR calculation.

Compound interest is interest on interest.  The more frequent the compounding, the higher the interest.

 

Interest earned or paid for 1 year on $10,000 at a 6% nominal rate

Compounding Interest Effective rate
daily
365 times per year
$618.31 6.183%
monthly
12 times per year
$616.78 6.168%
semi-annual
2 times per year
$609.00 6.090%
annual
once per year
$600.00 6.000%

Interest earned on checking and savings accounts is usually calculated on the balance in the account at the end of each day, but is paid monthly, therefore it is compounded monthly.

Interest earned on investments such as certificates of deposit (CDs) may be compounded at various frequencies.  When you are investing in these products, make sure you compare the effective rates of different options, not the nominal rate.

Mortgage interest is usually compounded semi-annually or monthly.  Payments on the mortgage can usually be paid monthly, bi-weekly, or weekly, but this does not affect the frequency of compounding.

When the term fixed rate is used in reference to a loan, it means that the rate will not change during the term of the loan.  The interest rate on a variable rate loan will fluctuate every time there is a change in the bank's prime rate.

Interest rates are affected by the Federal Reserve Board monetary policy.  The Reserve Board uses the federal funds rate (target rate for federal funds) as a monetary policy tool.

See also discount rate.

Inventory

Inventory can include goods for resale, spare parts, materials, works in progress, etc.  Inventory is classified as a current asset on the balance sheet,

Inventory turnover

The inventory turnover ratio is calculated as

cost of goods sold
average inventory

Average inventory can be determined by adding the beginning and ending inventory  in the year, and dividing by 2.    However, it is better to use a 12 month average if monthly inventory balances are available.

Generally, the higher the inventory turnover the better.  If the ratio is too low, or is decreasing, it means that more of the company funds are being tied up in inventory, and items in inventory could be becoming outdated.  In a business where prices are consistently dropping and products are constantly changing, such as computer hardware, it is wise to turn over the inventory as frequently as possible.  This has to be balanced against running short of inventory and losing sales as a result.

Investment company

This is a company which is primarily engaged in the business of investing in securities.  There are several kinds of investment companies:
1.  Mutual funds, also know as open-end funds
2.  Closed-end funds, and
3.  Unit investment trusts (UITs)
4.  Exchange-traded funds (ETFs)

The shares of mutual funds and UITs are redeemable.  Investors buy and sell the shares from and to the fund company at net asset value (NAV) per share at the end of the day.  

Shares of closed-end funds and exchange-traded funds are traded on a stock exchange, at their market value

UITs have a termination date at which time the fund will be liquidated, and proceeds are paid out to the investors.

Both closed-end funds and UITs have a fixed number of shares.  Open-end funds and exchange-traded funds have a variable number of shares.

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Revised: September 09, 2017

 

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