CFA® glossary: I

37 terms beginning with I.

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I-spread

A bond's yield minus the swap rate of the same maturity, interpolated where needed. A spread over the swap curve rather than over government bonds. Where it appears →

Illiquidity premium

The extra return paid for accepting that you cannot get out. It is a premium only to an investor who can genuinely sit through the lock-up. Where it appears →

Illusion of control

Believing one can influence or foresee outcomes more than one actually can. In modelling, extra detail makes a forecast feel more accurate without making it so. Where it appears →

Immunisation

Matching a bond's duration to the horizon so the price effect and the reinvestment effect of a rate change cancel, leaving the original yield realised. Where it appears →

Impairment

Writing an asset down to what it can now recover. No cash moves, and it is management conceding that something will not deliver what was assumed. Where it appears →

Implementation shortfall

The gap between a paper portfolio assumed to trade instantly at the decision price and what was actually achieved. It counts every cost: delay, market impact, fees and the opportunity cost of orders left unfilled. Where it appears →

Implied volatility

The volatility that makes an option pricing model reproduce an option's market price. An output of prices rather than an input, it is how traders quote and compare options across strikes and maturities. Where it appears →

Imputation tax system

A tax system in which shareholders are credited for the corporate tax already paid on the profits behind their dividends, so those profits are effectively taxed once, at the shareholder's rate.

Income approach

Valuing an asset from the income it is expected to produce, by capitalising one normalised year or discounting a forecast. Used for property and for businesses with predictable cash flows. Where it appears →

Indenture

The contract between a bond's issuer and its holders, administered by a trustee: the terms, and the covenants constraining the borrower. Where it appears →

Independence and objectivity

Standard I(B): use reasonable care to keep judgement independent, and do not offer, solicit or accept anything that could reasonably be expected to compromise one's own or another's independence. Where it appears →

Independent business

Work for compensation outside one's job that could compete with the employer. Under Standard IV(A) the employer must be told the services, expected duration and pay, and consent to all the terms before it starts.

Independent variable

The variable used to explain the dependent variable in a regression, also called the explanatory variable. The slope gives the change in the fitted value per unit of it. Where it appears →

Index cds

A credit default swap on an equally weighted portfolio of reference names. A default pays on that name's share of the notional, and the contract continues on the rest. Where it appears →

Indifference curve

Every combination of risk and expected return giving an investor the same utility. For a risk-averse investor it slopes upward, and more steeply the more risk-averse they are.

Indirect method

Presenting operating cash flow by starting from net income and adjusting for non-cash items and changes in working capital. Nearly every company uses it, and it explains why profit and cash differ. Where it appears →

Inflation risk premium

The extra yield holders of conventional bonds demand for bearing uncertainty about future inflation. It makes the break-even inflation rate exceed expected inflation.

Inflation target

An explicit inflation rate a central bank commits to achieve, commonly around 2%. Its power lies in anchoring expectations, which works only if the bank is believed.

Information asymmetry

One side of a transaction knowing much more than the other. A client who cannot judge the quality of advice has to rely on the adviser's standards instead of checking. Where it appears →

Information barrier

Procedures that stop material nonpublic information passing between departments, such as corporate finance and research or trading. Also called a firewall, it is the central control against misuse of such information. Where it appears →

Information coefficient

The correlation between a manager's forecast and realised active returns, the measure of skill. Even a small positive value can be worth a lot when applied across many independent decisions. Where it appears →

Information ratio

Active return divided by active risk: return over a benchmark for each unit of tracking error. It measures active skill, and scaling the active positions up or down leaves it unchanged. Where it appears →

Informationally efficient

Describes a market whose prices reflect available information, so a price is a fair guide to value and hard to beat after costs.

Initial margin

The deposit required to open a futures position, sized to cover a plausible one-day loss. It is also the level a margin call must restore the account to, not merely the maintenance level.

Initial public offering

A company's first sale of shares to the public, usually through underwriters who gauge demand and set the price. It creates the listing on which later secondary trading depends. Where it appears →

Initiation of coverage

The first full report an analyst publishes on a company, setting out the model, assumptions and valuation that later, shorter updates revise.

Interest coverage

Earnings before interest and tax over interest expense. It relates the obligation to the earnings that must meet it, which a balance sheet ratio cannot. Where it appears →

Interest rate option

An option whose payoff depends on an interest rate rather than a price. A call pays when the rate is above the strike, a put when it is below, scaled by notional and the accrual period.

Interest rate swap

An agreement to exchange fixed-rate for floating-rate interest payments on a notional amount that itself never changes hands. It converts debt from one type to the other without refinancing it. Where it appears →

Internal rate of return

The discount rate at which a project's net present value is zero. It says at what rate the project pays, not how much value it adds. Where it appears →

International fisher effect

The idea that nominal interest rate differentials reflect expected inflation differentials, because real interest rates are equal across countries. It combines the Fisher effect with real interest rate parity. Where it appears →

Interquartile range

The third quartile less the first: the spread of the middle half of the observations. It ignores the tails, so a single extreme value barely moves it.

Investment grade

Credit rated highly enough that default is remote, so what is being priced is the risk of the rating moving rather than of not being paid. Where it appears →

Investment policy statement

The document setting objectives and constraints before anyone manages anything. Its real job is to be read during a drawdown, by someone no longer thinking clearly. Where it appears →

Investment process

The basic format and general principles by which a manager selects and manages investments. Standard V(B) requires it to be disclosed to clients and prospects, with any material change disclosed promptly. Where it appears →

Investment thesis

The central argument for a recommendation: why the market has the share wrong and what will correct it. Everything else in a research report should support or test it. Where it appears →

Issuer rating

A credit rating of the issuer's senior unsecured debt, standing for its general creditworthiness. Ratings of particular issues are notched above or below it for seniority and expected recovery. Where it appears →