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Glossary

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Immunization strategy: A bond portfolio strategy whose goal is to immunize a portfolio against a general change in the rate of interest.

Implied repo rate: The rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date. Related: Cheapest to deliver issue

Implied volatility: The expected volatility in a stock's return derived from its option price, using an option-pricing model.

Income statement: A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Index: A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index.

Index fund: An investment fund designed to match the returns on a stock market index.

Indexing: A passive instrument strategy consisting of the construction of a portfolio of stocks designed to track the total return performance of an index of stocks.

Index option: An option whose underlying security is a stock index. This includes options on the overall market (such as the S&P 100 Index options) as well as options on narrower-based industry groups. Index options are cash settlement options.

Indifference curve: The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return.

Inflation risk: Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

Informationless trades: Trades that are the result of either a reallocation of wealth or an implementation of an investment strategy that only utilizes existing information.

Information-motivated trades: Trades in which an investor believes he or she possesses pertinent information not currently reflected in the stock's price.

Initial margin requirement: When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange.

Initial public offering (IPO): A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPO's generally must be prepared to accept very large risks for the possibility of large gains.

Input-output tables: Tables that indicate how much each industry requires of the production of each other industry in order to produce each dollar of its own output.

Institutional investors: Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, and endowment funds.

Institutionalization: The gradual domination of financial markets by institutional investors, as opposed to individual investors. This process has occurred throughout the industrialized world.

Insured bond: A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies.

Intangible asset: A legal claim to some future benefit, typically a claim to future cash. Financial assets, also called financial instruments or securities, are intangible assets.

Interest coverage ratio: The ratio of the earnings available for paying the interest for a given year to the annual interest expense.

Interest rate agreement: An agreement whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).

Interest rate cap: Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate.

Interest rate floor: An interest rate agreement in which payments are made when the reference rate falls below the strike rate.

Interest rate risk: For a bond, the risk that a rise in interest rates will decrease the bond's price. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates.

Interest rate swap: A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount.

Intermarket sector spread: The spread between the interest rate offered in two sectors of the bond market for issues of the same maturity.

Intermarket spread swaps: An exchange of one bond for another based on the manager's projection of a realignment of spreads between sectors of the bond market.

Internal market: The mechanisms for issuing and trading securities within a nation, including its domestic market and foreign market. Compare external market.

International Depository Receipt (IDR): A receipt issued by a bank as evidence of ownership of one or more shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR structure is that the corporation does not have to comply with all the regulatory issuing requirements of the foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depositary Receipt (ADR).

In-the-Money: A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. For example, if the march COMEX silver futures contract is trading at $6 an ounce, a March call with a strike price of 550 would be considered in-the-money by $0.50 an ounce. Related: Put

Intramarket sector spread: The spread between two issues of the same maturity within a market sector. For instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility corporate bonds.

Intrinsic value: The amount by which an option is in-the-money. An option which is not in-the-money has no intrinsic value. Related: In-the-Money

Inverted market: A futures market in which the nearer months are selling at price premiums to the more distant months. Related: Premium

Investment grade: A bond that is assigned a rating in the top four categories by commercial credit rating companies. Related: High-yield bond