Glossary of Financial Terms

BIS stands for Bank for International Settlements, which serves as banker to the central banks.

Bonus. Generic term covering the amounts allocated by pension companies to policyholders in addition to the originally guarantee (see Guaranteed interest rate).

Bonus potential related to benefits on premium-free policies is the commitment to allocate Bonus on premiums already paid into pension companies, and is a sub-item under Life-insurance provisions. Bonus potential related to benefits on premium-free policiesmay be used to cover losses on assets if the Collective bonus potential has been used.

Bonus potential related to future premiums is the commitment to allocate Bonus on premiums that are agreed, but not yet due, in pension companies, and is a sub-item under Life-insurance provisions.

Bonus reserves.A key indicator for pension companies expressing the undistributed reserves as a ratio of Life-insurance provisions. See also Equity reserves.

Callable bond. A bond which can be prematurely redeemed by the debtor on terms agreed in advance. Danish mortgage-credit bonds are callable bonds.

Capital adequacy/capital requirement. See Solvency requirement for credit institutions and Solvency margin for pension companies.

Capital base (pension companies).The capital that a pension company may use to cover its Solvency margin. The capital base comprises the pension company's equity capital less certain deductions, e.g. subsidiary insurance companies' solvency margin, and certain additional items.

Capital loss/gain on issue. The issuer's capital loss and gain on issue of securities at prices below and above Par.

Category 1, 2, 3 or 4, banking institution. Categorisation of Danish banking institutions based on volume of Working capital. Banking institutions in category 1 have a working capital of kr. 25 billion and above. Banking institutions in category 2 have a working capital from kr. 3 up to kr. 25 billion, banking institutions in category 3 have a working capital from kr. 250 million up to kr. 3 billion, and banking institutions in category 4 have a working capital of less than kr. 250 million.

CD see Certificate of Deposit.

Certificate of Deposit. A short-term negotiable certificate which is mainly traded between banking institutions. Abbreviated to CD.

Clearing. Compilation of each participants purchases and sales, resulting in the net position of each participant. See also Settlement and VP.

CLS is the abbreviation for Continuous Linked Settlement, which is an international currency-settlement system.

Collective bonus potential in pension companies is the undistributed reserves that can be used to allocate bonus in addition to the bonus amounts accrued to the Life-insurance provisions. May be used to cover losses on assets.

Commercial Paper. A short-term debt instrument (zero-coupon paper) with a maturity of up to one year. Abbreviated to CP.

Conglomerate (financial). A group comprising both an insurance company and a credit institution or investment company, and in which the financial activities account for a significant share of the balance sheet.

Core capital comprises paid-up share or guarantee capital, premium on issue and general reserves, adjusted for e.g. own shares and current deficit for the year.

Correction account. An account to which the banking institutions' ongoing lossesand Provisions are booked.

CP see Commercial Paper.

Credit risk. The risk of suffering a loss should the counterparty or debtor default on its payment obligations. See also Market risk.

Credit standing. Assessment of a debtor's willingness and ability to honour its commitments. See also Rating.

Deposit Guarantee Fund. The guarantee fund for depositors and investors is a private, self-governing fund established by law. It grants compensation to depositors and investors in banking institutions, mortgage-credit institutes and investment companies for losses in connection with suspension of payments or compulsory liquidation.

Derivative.See Financial derivative.

Duration. The price sensitivity of an outstanding amount or Portfolio to (small) interest-rate fluctuations. The higher the duration, the greater the price sensitivity.

Economic capital is the estimated capital required to cover the anticipated maximum loss with a predetermined probability. The calculation takes account of unexpected losses in relation to various risk types, e.g. Market and Credit risks and Operational risks. Economic capital is thus the credit institution's own assessment of the necessary capital base. See also Solvency requirement.

Equity capital is the owners' share of the company's capital, including share capital and accumulated profits.

Equity reserves. A key indicator expressing the extent to which the adjusted equity capital (equity capital plus subordinate loan capital) exceeds the statutory minimum requirement measured as a ratio of Life-insurance provisions in a pension company. Equity reserves and Bonus reserves together contribute to evaluation of the company's ability to pay a bonus and its financial strength, i.e. the company's resilience to fluctuating returns and unforeseen insurance and financial risks.

Exchange-rate risk is the risk of exchange-rate fluctuations that generate losses. See also Market risk.

Fair value states an estimate of the proceeds from transfer of an asset to a buyer on market terms. The fair value of a liability is an estimate of the set-off value of the liability on market terms.

Financial derivative is an instrument whose value is derived from the price of an underlying asset such as a security, a product or a currency. Options and Swaps are examples of financial derivatives.

Floating interest rate. An interest rate, which is floating during the maturity of the loan, e.g. that is agreed to float in step with another interest rate.

Gearing (financial). External financing as a ratio of equity.

Going concern. A company that is expected to continue its activities.

Guaranteed benefits are payment obligations guaranteed to the policyholders in a pension company. See also Guaranteed interest rateand Life-insurance provisions.

Guaranteed interest rate, also called the maximum technical interest rate,is the lowest return on the savings guaranteed to the policyholders in a pension company. The guaranteed interest rate is used to calculate the relationship between paid-in premiums and the Guaranteed benefits to policyholders in a pension company under the insurance agreement. The interest rate is based on a number of assumptions regarding risk of disability, mortality, and interest rates and costs.

Implied volatility. The theoretically derived Volatility in the Black-Scholes option price model for an underlying financial asset, calculated on the basis of the observed option prices. It follows that this type of volatility can not be directly observed.

Income from fee and commission comprises inter alia brokerage commission and commission on safekeeping accounts, guarantee commission, fees for use of payment systems and remortgaging fees, as well as ordinary borrowing fees.

Insolvency. A company's situation if the value of its equity is negative.

Insurance provisions. The total provisions made by a pension company for settlement of commitments relating to the insurance policies issued by the company. Insurance provisions are divided into various categories, of which the most important in pension companies is Life-insurance provisions.

Interest-rate guarantee. See Guaranteed interest rate.

Interest-rate margin. The difference between the rate of interest for lending and deposits.

Interest-rate risk.The risk that interest rate fluctuations generate losses. See also Market risk.

Internal interest rate. See Yield to maturity.

Investment banking. Activities related to analysis of and trading in securities and financial consulting services in connection with e.g. stock issues, public offerings and mergers and acquisitions.

Issue. The issue of e.g. securities on a stock exchange.

KFX. Stock index consisting of the 20 most traded Danish shares listed on the Copenhagen Stock Exchange. The composition of the index is revised twice a year.

Liable capital.Credit institutions' capital base required for compliance with the statutory Solvency requirement. Liable capital comprises Core capital and Supplementary capital, and the latter may not exceed half of the liable capital. Liable capital is adjusted for e.g. capital elements in other credit institutions.

Life-insurance provisions are measured by the actuaries appointed by the pension companies. Life-insurance provisions are divided into three sub-categories: Guaranteed benefits, Bonus potential related to future premiums, and Bonus potential related to benefits on premium-free policies. See also Insurance provisions and Collective bonus potential.

Liquidity is a measure of negotiability. Liquid securities are often characterised by a large circulating volume, high turnover and a narrow spread between bid and ask prices. See also Liquidity premium.

Liquidity premium. The premium which the buyer is willing to pay for a more Liquid asset.

Liquidity risk is the risk that the required financing is not available at a given price (interest rate) as the commitments fall due (e.g. if refinancing of securities or a loan is required).

Market risk. The risk that fluctuations in market prices (interest or exchange rates, or stock prices) will impose losses. See also Value-at-Risk.

Maximum technical interest rate. See Guaranteed interest rate.

Median. The numerical value dividing data into two equal shares of which one half is below and the other is above the median. Corresponds to the 50th Percentile.

Operating income over operating expenses is a key performance indicator to express banking institutions' earnings capability. The measure is calculated as financial resultover Ordinary costs.

Operational risk. The risk of losses due to insufficient or unsuccessful internal procedures, human or system errors, or external events.

Option. A Financial derivative granting the owner(buyer) the right, but not the obligation, to buy or sell an underlying instrument (e.g. a product, a security or a currency) at an agreed price (strike price) at an agreed future time. The seller of an option is obliged to recognise the owner's right. An option may be used as a hedging measure against market trends generating losses.

Ordinary costs of banks include personnel and administrative costs, depreciation and amortisation, and losses and provisions.

Ordinary profit of banks comprises e.g. net interest income, net fee and commission income, value adjustments, and the result of capital interests in associated and affiliated companies, less Ordinary costs.

Par. A price of 100 per cent of a paper's nominal value.

Percentile. The numerical value indicating the share of the observations below that value. For example, the 25th percentile for the Return on assets is the point below which 25 per cent of the companies with the lowest returns on assets lie.

Portfolio. A holding of assets.

Profitability. See Return on equity.

Provisions. For loans on which a loss is expected, the banking institution must write down the loan and book the amount under losses and provisions. There are two types of provision: A provisions are for losses with a probable risk, and B provisions for losses that are deemed inevitable, but the size of the loss cannot be fully estimated. Provisions are gathered in the Correction account.

Rating. An assessment of Credit standing given by rating agencies such as Fitch, Standard & Poor's and Moody's. Rating is typically used in connection with securities issue, and accounts for the probability of default and the size of the loss.

Return on assets describes a company's ability to achieve a return on invested capital. It is calculated as the company's profit as a ratio of its assets.

Return on equity is a measure of a company's profitability, i.e. its ability to achieve a return on the owners' investment. Return on equity is calculated as the company's profit as a ratio of equity capital.

Risk-weighted items. The risk-weighted assets and off-balance-sheet items, i.e. items subject to Credit risk, share risk, Interest-rate risk, Exchange-rate risk, commodity risk, etc. See also Solvency requirement.

RTGS system is a real-time gross settlement system in which payments are settled individually, immediately, and finally to the participants' accounts.

S&P500. US abbreviation of Standard & Poor's 500 Stock Index. It consists of the 500 most traded US stocks and is e.g. used as an underlying index for stock futures and stock Options.

Securitisation. The process of pooling lending as the basis for securities issue.

Settlement.Completion of the participants' trade by final settlement of agreed commitments. See also Clearing and VP.

Solvency. See Solvency ratio.

Solvency is an expression of a company's ability to sustain losses, i.e. the proportion of the company's assets that can be lost before the losses affect its borrowed capital. Calculated as the ratio of equity capital to assets.

Solvency margin. The statutory capital requirement of pension companies. The solvency margin is calculated on the basis of the Life-insurance provisions subject to a number of minor additions. See also Capital base (pension companies).

Solvency ratio is a key indicator, defined as Liable capital as a ratio of Risk-weighted items. See also Solvency requirement.

Solvency requirement. The statutory solvency requirement imposed on credit institutions. For a credit institution Liable capital must account for at least 8 per cent of the credit institution's Risk-weighted items. See also Solvency ratio.

Standard deviation measures the distance from the observations to the average in the data material.

Subordinate capital is external financing that in the event of compulsory liquidation is not repaid until after other debt has been settled. Subordinate capital, subject to certain requirements, may be included in the credit institutions' Supplementary capital. See also Liable capital.

Supplementary capital. Capital deposits in credit institutions offered as Liable capital that meets certain requirements (no default sanctions for the creditor, an option to defer interest payments and to write down the principal) as well as revaluation reserves.

Swap. A Financial derivative that is an agreement between two parties to exchange payments over a fixed period. Currency swaps are used to restructure payment flows between various currencies. Interest-rate swaps are typically used to restructure payment flows between fixed and floating interest rates. In contrast to a currency swap there is no exchange of principal between the parties to an interest-rate swap. The overall value of a swap is usually zero on conclusion, but may subsequently become positive or negative, depending on market developments in interest and exchange rates.

Term structure of interest rates is the relationship between securities' yields and maturity. A rising term structure, i.e. where yields on short-term securities are lower than yields on long-term securities, is considered normal. A falling term structure is described as inverse.

Value-at-Risk. A model to measure market risk. For a given Portfolio and within a fixed time horizon the model calculates the maximum loss that may arise with a given probability, based on historical experience. Abbreviated to VaR.

VaR. See Value-at-Risk.

Volatility. A parameter indicating the size of the fluctuations in an asset's price, e.g. the fluctuations in a stock price. See also Implied volatility.

VP is the abbreviation of Værdipapircentralen A/S (VP Securities Services). VP and the Copenhagen Stock Exchange are the two key market institutions in the Danish securities market. VP's most important tasks are electronic issue of securities, registration of ownership and rights concerning electronic securities, as well as Clearing and Settlement of securities deals. All stock-exchange-listed securities and a number of unlisted securities are held electronically at VP Securities Services.

Working capital comprises deposits, issued bonds, subordinate capital and equity capital. See also Category 1 banking institution.

Yield to maturity or internal interest rate. The fixed discount rate at which the present value of a payment flow equals the investment.

Zero-coupon yield. The Yield to maturity on a zero-coupon paper, i.e. a paper with no ongoing accrual of interest, and where the redemption payment falls due when the loan matures. The borrowing costs for a zero-coupon paper are solely the Capital loss on issue.