IBSL Higher Diploma in Banking and Finance (HDBF) Exam flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Money multiplier

The maximum amount of broad money created per unit of new reserves, equal to 1 divided by the reserve requirement ratio.

Reserve requirement ratio

The fraction of deposits a bank must hold as reserves with the central bank or as vault cash, limiting credit expansion.

Tier 1 capital

Core bank capital including common equity and disclosed reserves that absorbs losses while the bank remains a going concern.

Risk-weighted assets

Bank assets adjusted by credit risk weights set under Basel rules, used as the denominator for capital adequacy ratios.

Liquidity coverage ratio

High-quality liquid assets divided by projected net cash outflows over 30 days; Basel III requires a minimum of 100%.

Net interest margin

Interest income minus interest expense, divided by average earning assets, measuring a bank's core lending profitability.

Non-performing loan ratio

Loans in default or past due beyond a set period, divided by total gross loans, indicating asset quality deterioration.

Loan loss provision

An expense set aside on the income statement to absorb expected credit losses on loans, reducing reported net income.

Duration gap

Asset duration minus liabilities scaled by the liabilities-to-assets ratio; positive gap means equity falls when rates rise.

Deposit insurance

A statutory scheme reimbursing depositors up to a capped amount per depositor per bank if the institution fails.

Central bank policy rate

The interest rate a central bank sets on its lending or reserves to steer market rates and control inflation.

Moral hazard in banking

The risk that insured depositors and backstopped banks take excessive risk because losses are borne by others.

Maturity transformation

Banks fund long-term illiquid loans with short-term deposits, creating liquidity and interest-rate risk on the balance sheet.

Bank run

A sudden mass withdrawal of deposits driven by fear of insolvency, which can force asset fire sales and failure.

Repurchase agreement

A short-term secured loan where securities are sold with a commitment to repurchase them at a set price and date.

Future value formula

FV equals present value multiplied by one plus the interest rate raised to the number of compounding periods.

Present value formula

PV equals a future cash flow divided by one plus the discount rate raised to the number of periods.

Net present value

The sum of discounted future cash flows minus the initial investment; a positive NPV means the project adds value.

Internal rate of return

The discount rate that makes a project's net present value equal zero; accept projects whose IRR exceeds the hurdle rate.

CAPM

Required return equals the risk-free rate plus beta times the market risk premium, pricing systematic risk only.

Beta

A measure of an asset's sensitivity to market movements; beta of one means it moves with the market.

Weighted average cost of capital

The blended after-tax cost of a firm's equity and debt, weighted by their market value proportions, used to discount projects.

Yield to maturity

The single discount rate equating a bond's future coupons and principal to its current market price.

Modified duration

A measure of bond price sensitivity to yield changes; approximate percentage price change equals minus modified duration times yield change.

Gordon growth model

Share value equals next year's dividend divided by the required return minus the constant dividend growth rate.

Put-call parity

For a non-dividend stock, call price minus put price equals stock price minus the present value of the strike.

Systematic risk

Market-wide risk that cannot be diversified away, such as interest rate or recession risk, captured by beta.

Unsystematic risk

Firm-specific risk that can be eliminated through diversification and is not compensated with a risk premium.

Efficient market hypothesis

The theory that asset prices fully reflect available information, making consistent risk-adjusted outperformance difficult.

Leverage ratio

Total debt divided by equity or total assets, showing how much borrowed funds amplify returns and losses.

Current ratio

Current assets divided by current liabilities, measuring a firm's ability to meet short-term obligations.

Interest rate parity

The forward exchange rate premium or discount equals the interest rate differential between two currencies.