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Equity swap

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Definition of Equity swap

Equity Swap Image 1

Equity swap

A swap in which the cash flows that are exchanged are based on the total return on some stock
market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.



Related Terms:

Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.


All equity rate

The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.


Amortizing interest rate swap

swap in which the principal or national amount rises (falls) as interest rates
rise (decline).


Asset/equity ratio

The ratio of total assets to stockholder equity.


Asset for asset swap

Creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.



Asset swap

An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
provide a better match with its iabilities.


Bottom-up equity management style

A management style that de-emphasizes the significance of economic
and market cycles, focusing instead on the analysis of individual stocks.


Equity Swap Image 2

Call swaption

A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.


Circus swap

A fixed rate currency swap against floating U.S. dollar LIBOR payments.


Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.


Contra-equity account

An account that reduces an equity account. An example is Treasury stock.


Cost of Equity

Same as the cost of common stock. Sometimes viewed as the
rate of return stockholders require to maintain the market value of
the company's common stock.


Currency swap

An agreement to swap a series of specified payment obligations denominated in one currency
for a series of specified payment obligations denominated in a different currency.


Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.


Debt/Equity Ratio

A comparison of debt to equity in a company's capital structure.


debt-to-equity ratio

A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.


Deferred equity

A common term for convertible bonds because of their equity component and the
expectation that the bond will ultimately be converted into shares of common stock.


Differential swap

swap between two LIBO rates of interest, e.g. yen LIBOR for dollar LIBOR. Payments are
in one currency.



Dual syndicate equity offering

An international equity placement where the offering is split into two
tranches - domestic and foreign - and each tranche is handled by a separate lead manager.


Equity

Represents ownership interest in a firm. Also the residual dollar value of a futures trading account,
assuming its liquidation at the going market price.


Equity

Funds raised from shareholders.


Equity

Amounts contributed to the company by the owners (contributed capital) plus the residual earnings of the business (retained earnings).


equity

Refers to one of the two basic sources of capital for a business, the
other being debt (borrowed money). Most often, it is called owners’
equity because it refers to the capital used by a business that “belongs”
to the ownership interests in the business. Owners’ equity arises from
two quite distinct sources: capital invested by the owners in the business
and profit (net income) earned by the business that is not distributed to
its owners (called retained earnings). Owners’ equity in our highly developed
and sophisticated economic and legal system can be very complex—
involving stock options, financial derivatives of all kinds, different
classes of stock, convertible debt, and so on.


Equity

The difference between the total of all recorded assets and liabilities on the balance
sheet.


Equity

Ownership. Common stock represents equity in a corporation.


Equity

The net worth of a business, consisting of capital stock, capital (or paid-in) surplus (or retained earnings), and, occasionally, certain net worth reserves. Common equity is that part of the total net worth belonging to the common shareholders. Total equity includes preferred shareholders. The terms common stock, net worth, and common equity are frequently used interchangeably.


equity

The net worth of a company. This represents the ownership interest of the shareholders (common and preferred) of a company. For this reason, shares or stocks are often known as equities.


Equity-based insurance

Life insurance or annuity product in which the cash value and benefit level fluctuate according to the performance of an equity portfolio.



Equity Buy-Back

Refers to the investors percentage ownership of a company that can be re-acquired by the company, usually at a pre-determined amount.


Equity cap

An agreement in which one party, for an upfront premium, agrees to compensate the other at
specific time periods if a designated stock market benchmark is greater than a predetermined level.


Equity claim

Also called a residual claim, a claim to a share of earnings after debt obligation have been
satisfied.


Equity collar

The simultaneous purchase of an equity floor and sale of an equity cap.


Equity contribution agreement

An agreement to contribute equity to a project under certain specified
conditions.


Equity floor

An agreement in which one party agrees to pay the other at specific time periods if a specific
stock market benchmark is less than a predetermined level.


Equity investment

Through equity investment, investors gain part ownership of the corporation. The primary type of equity investment is corporate stock.


Equity kicker

Used to refer to warrants because they are usually issued attached to privately placed bonds.


Equity-linked policies

Related: Variable life


Equity market

Related:Stock market


Equity Method

Accounting method for an equity security in cases where the investor has sufficient
voting interest to have significant influence over the operating and financial policies of an
investee.


Equity multiplier

Total assets divided by total common stockholders' equity; the amount of total assets per
dollar of stockholders' equity.


Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.


Equity Security

An ownership interest in an enterprise, including preferred and common stock.


Equityholders

Those holding shares of the firm's equity.


Euroequity issues

Securities sold in the Euromarket. That is, securities initially sold to investors
simultaneously in several national markets by an international syndicate. Euromarket.
Related: external market


Extension swap

Extending maturity through a swap, e.g. selling a 2-year note and buying one with a slightly
longer current maturity.


Foreign equity market

That portion of the domestic equity market that represents issues floated by foreign companies.


Foreign exchange swap

An agreement to exchange stipulated amounts of one currency for another currency
at one or more future dates.


GEMs (growing-equity mortgages)

Mortgages in which annual increases in monthly payments are used to
reduce outstanding principal and to shorten the term of the loan.


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. For example, one party
will pay fixed and receive variable.


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.


Investor's equity

The balance of a margin account. Related: buying on margin, initial margin requirement.


Leveraged equity

Stock in a firm that relies on financial leverage. Holders of leveraged equity face the
benefits and costs of using debt.


Liability swap

An interest rate swap used to alter the cash flow characteristics of an institution's liabilities so
as to provide a better match with its assets.


Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.


owners' equity

Refers to the capital invested in a business by its shareowners
plus the profit earned by the business that has not been distributed
to its shareowners, which is called retained earnings. Owners’
equity is one of the two basic sources of capital for a business, the other
being borrowed money, or debt. The book value, or value reported in a
balance sheet for owners’ equity, is not the market value of the business.
Rather, the balance sheet value reflects the historical amounts of capital
invested in the business by the owners over the years plus the accumulation
of yearly profits that were not paid out to owners.


Owners' equity

The total of all capital contributions and retained earnings on a business’s
balance sheet.


Preferred equity redemption stock (PERC)

Preferred stock that converts automatically into equity at a
stated date. A limit is placed on the value of the shares the investor receives.


Pure yield pickup swap

Moving to higher yield bonds.


Put swaption

A financial tool in which the buyer has the right, or option, to enter into a swap as a floatingrate
payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.


Quanto swap

See: differential swap.


Quasi-Equity

Funds, other than paid-up capital and retained earnings, employed in a business and which will remain in a business as permanent capital.


Rate anticipation swaps

An exchange of bonds in a portfolio for new bonds that will achieve the target
portfolio duration, based on the investor's assumptions about future changes in interest rates.


RATE OF RETURN ON STOCKHOLDERS’ EQUITY

The percentage return or profit that management made on each dollar stockholders invested in a company. Here’s how you figure it:
(Net income) / (Stockholders’ equity)


RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)


Return on Common Equity Ratio

A measure of the percentage return earned on the value of the
common equity invested in the company. It is calculated by
dividing the net income available for distribution to shareholders
by the book value of the common equity.


Return on equity (ROE)

Indicator of profitability. Determined by dividing net income for the past 12
months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors
use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets
(ROA) multiplied by financial leverage (total assets/total equity).


return on equity (ROE)

This key ratio, expressed as a percent, equals net
income for the year divided by owners’ equity. ROE should be higher than
a business’s interest rate on debt because the owners take more risk.


Shareholder's Equity

Represents the total assets of a corporation less liabilities.


Shareholders' equity

This is a company's total assets minus total liabilities. A company's net worth is the
same thing.


Shareholders' equity

The total amount of contributed capital and retained earnings; synonymous with stockholders' equity.


Shareholders' Equity

The residual interest or owners' claims on the assets of a corporation
that remain after deducting its liabilities.


Stockholder equity

Balance sheet item that includes the book value of ownership in the corporation. It
includes capital stock, paid in surplus, and retained earnings.


Stockholder's equity

The residual claims that stockholders have against a firm's assets, calculated by
subtracting total liabilities from total assets.


Stockholders' equity

The total amount of contributed capital and retained earnings; synonymous with shareholders’ equity.


stockholders' equity, statement of changes in

Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the owners’ equity
accounts of a business during the period—including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting owners’ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
owners’ equity accounts.


STOCKHOLDERS’ (OR OWNERS’) EQUITY

The value of the owners’ interests in a company.


Stratified equity indexing

A method of constructing a replicating portfolio in which the stocks in the index
are classified into stratum, and each stratum is represented in the portfolio.


Substitution swap

A swap in which a money manager exchanges one bond for another bond that is similar in
terms of coupon, maturity, and credit quality, but offers a higher yield.


Swap

An arrangement whereby two companies lend to each other on different terms, e.g. in different
currencies, and/or at different interest rates, fixed or floating.


Swap

An exchange of cash flows between two counterparties. The
counterparties may exchange flows in different currencies
(currency swap) or exchange floating interest rate payments for
fixed rate payments (interest rate swap).


Swap

A contract between two parties to exchange cash flows in the future
according to some formula.


swap

Arrangement by two counterparties to exchange one stream of cash flows for another.


Swap assignment

Related: swap sale.


Swap buy-back

The sale of an interest rate swap by one counterparty to the other, effectively ending the swap.


Swap optio

See: swaption.
Related: Quality option.


Swap rate

The difference between spot and forward rates expressed in points, e.g., $0.0001 per pound sterling.


Swap reversal

An interest rate swap designed to end a counterparty's role in another interest rate swap,
accomplished by counterbalancing the original swap in maturity, reference rate, and notional amount.


Swap sale

Also called a swap assignment, a transaction that ends one counterparty's role in an interest rate
swap by substituting a new counterparty whose credit is acceptable to the other original counterparty.


Swaption

Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate
swap agreement by some specified date in the future. The swaption agreement will specify whether the buyer
of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the
counterparty to the swap if the buyer exercises.


Swaption

A swap option; an option on an interest-rate swap. The option gives
the holder the right to enter into a contracted interest-rate swap at a specified
future date. See swap.


Tax swap

swapping two similar bonds to receive a tax benefit.


Top-down equity management style

A management style that begins with an assessment of the overall
economic environment and makes a general asset allocation decision regarding various sectors of the financial
markets and various industries. The bottom-up manager, in contrast, selects the specific securities within the
favored sectors.


Total debt to equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.



 

 

 

 

 

 

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