Glossary Of Financial Terms starting with D

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List of Financial Terms (Alphabet Wise)

Debenture A debt security issued by companies, having a certain MATURITY and bearing a stated COUPON RATE. Debentures may be unsecured or secured by ASSETS such as land and building of the issuing company. Debenture holders have a prior claim on the earnings (coupon) and ASSETS in the event of liquidation, as compared to PREFERENCE and equity shareholde` (See also BOND, DEBENTURE REDEMPTION RESERVE and DEBENTURE TRUSTEE.)

Debenture Redemption Reserve (DRR) The term is given to the reserves that are to be compulsorily created by companies for the express purpose of retiring DEBENTURES issued by them whose MATURITY exceeds 18 months. Before redemption commences, the reserves (DRR) must cumulate to 50 percent of the amount of debentures issued.

Debenture Trustee The third party to a DEBENTURE issue, with whom the TRUST DEED is executed and who must ensure that the issuer abides by the promises, pledges and restrictions relating to the DEBENTURE issue. The role of the trustee is that of a watchdog who acts on behalf of the debenture holde` (See also TRUST DEED.)

Debt Service Coverage Ratio (DSCR) A ratio used to assess the financial ability of a borrower to meet debt obligations. While appraising loand requests, lending institutions ascertain the debt servicing capacity from financial projections submitted, by computing the ratio of cash accruals plus interest payments (on term loans) to the sum of interest and loan repayments :
DSCR = Profits after taxes – DEPRECIATION + Interest charges
Interest charges + Loan repayments
The figures in the numerator and denominator are typically aggregated for 10 years in working out the DSCR.

Debt-Equity Ratio This ratio is used to analyze FINANCIAL LEVERAGE. It is a structural ratio that gauges the level of debt financing, and is worked out by dividing total debt, short-term and long-term, by NET WORTH. The denominator would comprise total equity of common stockholders and PREFERENCE capital.

Deficit In general, it connotes a shortfall. In the context of a BUDGET, it refers to the excess of expenditure over revenues during a certain period. However, there are specific measures of deficit used in India for a financial year, as described below :

Revenue Deficit The excess of expenditure over receipts in the revenue account fo the Government of India. Receipts include taxes and non-tax revenues such as interest and DIVIDENDS and also grants. Some fo the expenditure items are interest, SUBSIDIES, certain defense outflows, salaries, pensions etc. Thus, the revenue deficit is a good indicator of whether the government is living within its means. The recent phenomenon of high levels of revenue deficit financed by borrowings to meet consumption expenditure has ominous implications. Whereas outflows on account of interest charges and loan repayments will go up, the creation of productive ASSETS decelerates, as funds are diverted to current expenditure.

In the Union Budget 1996-97, it was proposed that a high-level, 'Expenditure Management and Reforms Commission', be appointed to tackle the issue of public expenditure management and control concerning the Central Government.

Budget Deficit The figure that results by subtracting the total expenditures (on revenue and capital accounts) from the total receipts (on revenue and capital accounts) of the Government of India. The budget deficit is financed through the issue of Ad hoc TREASURY BILLS and/or by drawing down cash balances with the Reserve Bank of India. As mentioned above, revenue receipts include tax and non-tax revenues. Capital receipts comprise recovery of loans, proceeds from the sale of government assets and borrowings other than through Treasury Bills. Capital expenditure includes loans and advances to states and public sector units, and capital outlay.

Deflation A phenomenon of falling prices in an economy, which may be due to a contraction in MONEY SUPPLY.

Depository A system of computerized book-entry of securities. This arrangement enables a transfer of shares through a mere book-entry rather than the physical movement of certificates. This is because the scrips are 'dematerialized' or alternatively, 'immobilized' under the system.

A depository performs the functions of holding, transferring and allowing withdrawal of securities through its agents viz., depository participants. For settlement of trades done at an exchange, the depository interacts with a clearing corporation which oversees the payment of funds and delivery of securities.

Under dematerialization, securities in physical form are destroyed, whereas under immobilization, the securities are stored away in vaults. Further, rematerialization is possible, so as to restore securities to physical form.

The system of maintaining ownership records in the form of electronic holdings will help to eliminate problems that are associated with physical certificates such as fake/torn certificates and loss in transit.

Depreciation An accounting process by which the cost of a FIXED ASSET, such as a building or machinery, is allocated as a periodic expense, spread over the depreciable life of the ASSET. The term also means the amount of expense determined by such a process. Sometimes, it is called AMORTIZATION when the ASSET is intangible or 'depletion' when the asset is a natural resource, such as minerals. There are different methods of depreciation such as the Straight Line Method and the Written Down Value (WDV) method.

In the context of international finance, depreciation refers to the decline in the market value of a currency in relation to another currency. For example, if one U.S. dollar could be bought in the market for Rs.40 as against Rs.41.50 earlier, it means that the dollar has depreciated vis-à-vis the Indian rupee. This would result in American goods and services becoming cheaper to Indians and Indian goods and services becoming more expensive to Americans.

Depression An economic condition that is characterized by a severe contraction in economic activity, which is manifested. In numerous business shut-downs, widespread unemployment, and declining investment in plant and equipment on account of falling sales.

Derivative A financial contract that derives its value from another ASSET or an index of asset values. These underlying assets maybe foreign exchange, BONDS, equities or commodities. For example, FORWARD CONTRACTS relate to foreign exchange; futures to commodities, debt instruments, currencies or stock indices; and OPTIONS to equities. Derivatives are traded at organized exchanges and in the over-the-counter (OTC) market.

Derivatives traded at exchanges are standardized contracts having standard delivery dates and trading units. OTC derivatives are customized contracts that enable the parties to select the trading units and delivery dates to suit their requirements. Moreover, there are fewer regulatory restrictions and this facilitates innovation. A major difference between the two is that of counter party risk – the risk of default by either party. With exchange-traded derivatives, the risk is controlled by exchanges through clearing-houses which act as a contractual intermediary and impose margin requirements. In contrast, OTC derivatives signify greater vulnerability. OPTIONS derive their values from shares or stock market indices; an option confers the right without any obligation to buy or sell an asset at a predetermined price on or before a stipulated EXPIRATION DATE. Interest-rate futures are tied to debt instruments. This contract binds the parties to exchange a debt security against payment e.g., TREASURY BILL, on a future date at a predetermined price. The value of the futures contract is governed by the value of the underlying Treasury Bill. If yields decline, the value of the futures contract will rise because the buyer has locked in a higher interest rate. SWAPS are agreements between two parties to exchange cash flows in the future according to a predetermined formula.

With their universal recognition as risk-management tools, trading in derivatives has registered a phenomenal growth in the Western financial markets. The relationship with other assets and certain other features makes derivatives useful for SPECULATION, HEADGING, ARBITRAGE and PORTFOLIO adjustments.

India may soon see the introduction of exchange-traded derivatives on stock indices and other financial assets if the recommendations of the L.C. GUPTA COMMITTEE are implemented shortly.

Devaluation The lowering of a country's official exchange rate in relation to a foreign currency (or to gold), so that exports compete more favorably in the overseas markets. Devaluation is the opposite of REVALUATION. (See also DEPRECIATION)

Dhanuka Committee A committee headed by Justice D. R. Dhanuka to review securities related Acts, regulations and rules, set up by the Securities and Exchange Board of Indian (SEBI) in March 1997. Some of its recommendations as gleaned from press reports are :

  1. The MUTUAL FUND and collective schemes of the Unit Trust of India (UTI) must come under the purview of SEBI.
  2. In case of differences, the SEBI Act must prevail over the UTI Act.
  3. Self-regulatory organizations in the financial sector such as AMBI and AMFI must register with SEBI.
  4. The exemption from payment of stamp duty that is available to beneficial owners of dematerialized shares should also be extended to transfer of shares in physical form.
  5. Companies making a public issue of over Rs.10 crore should use the DEPOSITORY option.
Direct Taxes Taxes whose impact and incidence are on the same person. The taxes levied on income, and wealth tax are instances of direct taxes.

Discount This refers to :

  1. The margin by which a security's market price is lower than its face value.
  2. In security analysis, it means the adjustment in security prices consequent to the assimilation of new information about a company, or news in general. An illustration is the increase in the price of a stock following the news of the company bagging big sale orders.
  3. Reduction in the sale price of goods.

Discount Rate The interest rate used in calculating the PRESENT VALUE of future cash flows.

Disinvestments The sale of shareholding by an individual or institution in order to raise cash.

Diversification The process of spreading out investments so as to limit exposure and reduce risk. Individuals do this by investing in shares of different companies or by combining stocks with DEBENTURES, MUTUAL FUND shares, FIXED DEPOSITS and other investment vehicles. Companies achieve diversification by venturing into new and unrelated business areas.

Dividend The payment made by a company to its shareholders. Legal and financial considerations have a bearing on the level of dividend to be paid. For instance, dividends may be paid out of profits alone; so also, a growing company needs funds to finance its expansion and hence may pay only a modest dividend, in order to conserve resources.

Dow Theory A theory to ascertain the emergence of a primary trend (a trend which indicates either a bullish or bearish phase) in the stock market. It seeks confirmation of whether a long-term market advance or decline is under way, by examining the movement of the Dow Jones Industrial Average in conjunction with the Dow Jones Transportation Average. These averages are summary measures of stock prices in the U.S.

Dumping The sale of goods in a foreign market at a price that is below the price realized in the home country, after allowing for all costs of transfer including transportation charges and duties. The motive may be to enhance revenues, offload surplus stocks or a predatory intent of killing foreign competition.