Accreting: An accreting principal is one which increases during the life of the deal. See amortising, bullet.

Accreting swap: Swap whose notional amount increases during the life of the swap (opposite of amortising swap).

Accrued interest: The proportion of interest or coupon earned on a bond from the previous coupon payment date until the value date.

Accumulated value: The same as future value.

act/360: A day/year count convention taking the number of calendar days in a period and a "year" of 360 days.

act/365: A day/year convention taking the number of calendar days in a period and a "year" of 365 days. Under the ISDA definitions used for interest rate swap documentation, act/365 means the same as act/act.

act/act: A day/year count convention taking the number of calendar days in a period and a "year" equal to the number of days in the current coupon period multiplied by the coupon frequency. For an interest rate swap, that part of the interest period falling in a leap year is divided by 366 and the remainder is divided by 365.

Agency securities: In the United States, securities issued by government-sponsored entities, such as the Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

All or nothing: Digital option. This option's put (call) pays out a pre-determined amount ("the all") if the index is below (above) the strike price at the option's expiration. The amount by which the index is below (above) the strike is irrelevant; the payout will be all or nothing.

All-in price: See dirty price.

American: An American option is one which may be exercised at any time during its life.

Amortising: An amortising principal is one which decreases during the life of a deal, or is repaid in stages during a loan. Amortising an amount over a period of time also means accruing for it pro rata over the period. See accreting, bullet.

Annuity: An investment providing a series of (generally equal) future cash flows.

Appreciation: An increase in the market value of a currency in terms of other currencies. See depreciation, revaluation.

Arbitrage: The process of buying securities in one country, currency or market, and selling identical securities in another to take advantage of price differences. When this is carried out simultaneously, it is in theory a risk-free transaction. There are many forms of arbitrage transactions. For instance in the cash market a bank might issue a money market instrument in one money centre and invest the same amount in another centre at a higher rate, such as an issue of three-month US dollar CDs in the United States at 5.5% and a purchase of three-month Eurodollar CDs at 5.6%. In the futures market arbitrage might involve buying three-month contracts and selling forward six-month contracts.

Arbitrageur: Someone who undertakes arbitrage trading.

Arch: (autoreggressive conditional heteroscedasticity) A discrete-time model for a random variable. It assumes that variance is stochastic and is a function of the variance of previous time steps and the level of the underlying.

Asian: An Asian option depends on the average value of the underlying over the option's life.

Ask: See offer.

Asset: Probable future economic benefit obtained or controlled as a result of past events or transactions. Generally classified as either current or long-term.

Asset & Liability Management (ALM): The practice of matching the term structure and cash flows of an organisation's asset and liability portfolios to maximise returns and minimise risk. Also includes the deliberate mis-matching of cash flows to take account of views on the short-term yield curve.

Asset allocation: Distribution of investment funds within an asset class or across a range of asset classes for the purpose of diversifying risk or adding value to a portfolio.

Asset securitisation: The process whereby loans, receivables and other illiquid assets in the balance sheet are packaged into interest-bearing securities that offer attractive investment opportunities.

Asset swap: An interest rate swap or currency swap used in conjunction with an underlying asset such as a bond investment. See liability swap.

Asset-backed security: A security which is collaterised by specific assets - such as mortgages - rather than by the intangible creditworthiness of the issuer.

Asset-risk benchmark: Benchmark against which the riskiness of a corporation's assets may be measured. In sophisticated corporate risk management strategies the dollar risk of the liability portfolio may be managed against an asset-risk benchmark.

At-the-money (ATM): An option is at-the-money if the current value of the underlying is the same as the strike price. See in-the-money, out-of-the-money.

Auction: A method of issuing bonds where institutions submit bids to the issuer on a price or yield basis. Auction rules vary considerably across markets.

Average cap: Also known as an average rate cap, a cap on an average interest rate over a given period rather than on the rate prevailing at the end of the period. See also average price (rate) option.

Average price (rate) option: Option on a currency's average exchange rate or commodity's average spot price in which four variables have to be agreed between buyer and seller: the premium, the strike price, the source of the exchange rate or commodity price data and the sampling interval (each day, for example). At the end of the life of the option the average spot exchange rate is calculated and compared with the strike price. A cash payment is then made to the buyer of the option that is equal to the face amount of the option times the difference between the two rates (assuming the option is in-the-money; otherwise it expires worthless).

Back-testing: The validation of a model by feeding it historical data and comparing the results with historical reality.

Backwardation: The situation when a forward of futures price for something is lower than the spot price (the same as forward discount in foreign exchange). See contango.

Balance sheet: Statement of the financial position of an enterprise at a specific point in time, giving assets, liabilities and stockholders' equity.

Band: The Exchange Rate Mechanism (ERM II) of the European Union links the currencies of Denmark and Greece in a system which limits the degree of fluctuation of each currency against the euro within a band (of 15 per cent for the drachma and 21/4 per cent for the krone) either side of an agreed par value.

Banker's acceptance: See bill of exchange.

Barbell: In its simplest form, a position consisting of long positions in short- and long-dated bonds, and no holding of a medium-dated bond. A barbell portfolio would consist of a portfolio of very short-dated and very long-dated bonds.

Bargain: A transaction undertaken on the London Stock Exchange.

Barrier option: A barrier option is one which ceases to exist, or starts to exist, if the underlying reaches a certain barrier level. See knock out/in.

Base currency: Exchange rates are quoted in terms of the number of units of one currency (the variable or counter currency) which corresponds to one unit of the other currency (the base currency).

Basis: The underlying cash market price minus the futures price. In the case of a bond futures contract, the futures price must be multiplied by the conversion factor for the cash bond in question.

Basis point: In interest rate quotations, 0.01 per cent.

Basis rate: The rate applicable in a basis swap.

Basis risk: A form of market risk that arises whenever one kind of risk exposure is hedged with an instrument that behaves in a similar, but not necessarily identical way. For instance a bank trading desk may use three-month interest rate futures to hedge its commercial paper or euronote programme. Although eurocurrency rates, to which futures prices respond, are well correlated with commercial paper rates they do not always move in lock step. If, therefore, commercial paper rates move by 10 basis points but futures prices dropped by only 7 basis points, the 3 bp gap would be the basis risk.

Basis swap: An interest rate swap where both legs are based on floating rate payments.

Basis trade: Buying the basis means selling a futures contract and buying the commodity or instrument underlying the futures contract. Selling the basis is the opposite.

Basket option: Option based on an underlying basket of bonds, currencies, equities or commodities.

Bear spread: A spread position taken with the expectation of a fall in value in the underlying.

Bearer bond: A bond for which physical possession of the certificate is proof of ownership. The issuer does not know the identity of the bondholder. Traditionally the bond carries detachable coupon, one for each interest payment date, which are posted to the issuer when payment is due. At maturity the bond is redeemed by sending in the certificate for repayment. These days bearer bonds are usually settled electronically, and while no register of ownership is kept by the issuer, coupon payments may be made electronically.

Benchmark: A bond whose terms set a standard for the market. The benchmark usually has the greatest liquidity, the highest turnover and is usually the most frequently quoted. It also usually trades expensive to the yield curve, due to higher demand for it amongst institutional investors.

Beta: The sensitivity of a stock relative to swings in the overall market. The market has a beta of one, so a stock or portfolio with a beta greater than one will rise of fall more than the overall market, whereas a beta of less than one means that the stock is less volatile.

Bid: The price at which a market maker will buy bonds. A tight bid-offer spread is indicative of a liquid and competitive market. The bid rate in a repo is the interest rate at which the dealer will borrow the collateral and lend the cash. See offer.

Bid-offer: The two-way price at which a market maker will buy and sell stock.

Big figure: In a bond price quotation, the price omitting the decimal portion. For example, if the 10-year benchmark is quoted as 109.15-21, the big figure is 109. See points.

Bilateral netting: The ability to offset amounts owed to a counterparty under one contract against amounts owed to the same counterparty under another contract - for example, where both transactions are governed by one master agreement. Also known as cherry-picking.

Bill: A bill of exchange is a payment order written by one person (the drawer) to another, directing the latter (drawee) to pay a certain amount of money at a future date to a third party. A bill of exchange is a bank draft when drawn on a bank. By accepting the draft, a bank agrees to pay the face value of the obligation if the drawer fails to pay, hence the term banker's acceptance. A Treasury bill is short-term government paper of up to one year's maturity, sold at a discount to principal value and redeemed at par.

Bill of exchange: A short-term, zero-coupon debt issued by a company to finance commercial trading. If it is guaranteed by a bank, it becomes a banker's acceptance.

Binomial tree: A mathematical model to value options, based on the assumption that the value of the underlying can move either up or down a given extent over a given short time. This process is repeated many times to give a large number of possible paths (the "tree") which the value could follow during the option's life.

BIS (Bank for International Settlements): Known as the central bank for central banks, an international organisation situated in Basel, Switzerland, which acts as the central bank for sovereign entities. It produced the "Basel accord" in 1988, implemented in 1992, which established capital requirements for banking institutions based on the risk-weighting of their assets; it also produced rules on the capital treatment of derivative instruments.

Black-Scholes: A widely used option pricing formula devised by Fischer Black and Myron Scholes.

Blended interest rate swap: Result of adding forward swap to an existing swap and blending the rates over the total life of the transaction.

Bloomberg: The trading, analytics and news service produced by Bloomberg LP; also used to refer to the terminal itself. Introduced by ex-Salomon Brothers trader Mike Bloomberg.

Bond basis: An interest rate is quoted on a bond basis if it is on an act/365, act/act or 30/360 basis. In the short term (for accrued interest, for example), these three are different. Over a whole (non-leap) year, however, they all equate to 1. In general, the expression "bond basis" does not distinguish between them and is calculated as act/365. See money-market basis.

Bond-equivalent yield: The yield which would be quoted on a US treasury bond which is trading at par and which has the same economic return and maturity as a given treasury bill.

Bootstrapping: A method of deriving the term structure of interest rates from market bond prices and yields, using successive bonds to calculate the spot rate along the maturity term structure. In mathematics, a method of solving simultaneous equations in which the first equation contains one unknown, the next equation contains two unknowns and so on. The result obtained by solving the first equation is used to solve the second equation, and so on.

BPV: Basis point value. The price movement resulting from a one basis point change in yield.

Break forward: A product equivalent to a straightforward option, but structured as a forward deal at an off-market rate which can be reversed at a penalty rate.

Broken date: A maturity date other than the standard ones (such as 1 week, 1, 2, 3, 6 and 12 months) normally quoted.

Broker-dealers: Members of the London Stock Exchange who may intermediate between customers and market makers; may also act as principals, transacting business with customers from their own holdings of stock.

Bull spread: A spread position taken with the expectation of a rise in value in the underlying.

Bulldog: Sterling domestic bonds issued by non-UK domiciled borrowers. These bonds trade under a similar arrangement to Gilts and are settled via the Central Gilts Office (now CREST).

Bullet: A loan/deposit has a bullet maturity if the principal is all repaid at maturity. See amortising.

Buy/sell-back: Opposite of sell/buy-back.