The sustainable investor for a changing world

Financial glossary

I

Inflation-Linked Bond

Inflation-linked bonds (ILB) are bonds whose nominal, and therefore coupon, are indexed to the Consumer Price Index (CPI). Such features enable their holders to be hedged against inflation.

Information ratio

The Information Ratio (IR) corresponds to the ratio of Alpha over the Tracking Error (i.e. a measurement of portfolio returns beyond the returns of a benchmark, compared to the volatility of those returns). This ratio is often considered as a good indicator of a portfolio manager’s skills, as it mesures his ability to generate excess returns relative to a benchmark without being too far away from the market.

Initial public offering (IPO)

A company’s initial public offering (IPO) refers to the first sale of stocks to the public. IPOs enable companies to be listed on an exchange and thus benefit from access to capital, liquidity, prestige and reduced cost of capital.

Investment grade

Investment grade is a high consideration of credit quality (low probability of default) assigned by a rating agency. For instance, to be classified as investment grade according to Standard and Poor’s, a bond or an issuer must have a rating greater than BBB-. Investment grade is in contrast to high yield.

ISDA

The International Swaps and Derivatives Association (ISDA) is an organisation whose main purpose is to standardise and facilitate the OTC derivatives market. To fulfil its mission, the ISDA has established a set of standard documents, in particular:

  • The Master ISDA agreement which defines standard terms and provisions on all OTC transactions between two counterparties.
  • The Credit Support Annex (linked to the Master ISDA agreement) which provides provisions to mitigate counterparty risk generated by OTC trades.

The ISDA is also in charge of defining and watching credit events, as well as ascertaining their occurrences. Furthermore, the ISDA organises auctions following credit events to determine the recovery rate to be used on CDS settlements.

Islamic finance

Islamic finance is an alternative to the traditional banking system which comprises components not permitted by Shariah (Islamic rules and jurisprudence). In this context, Islamic financial products have to comply with key rules, such as economic participation, which must be free of forbidden elements such as usury (Riba), uncertainty (Gharar) and gambling (Maisir).