Financial glossary
for new-age investors

Discover financial terms and learn new concepts.

Government Bond

Government bonds are publicly traded: that means that their price is set by the market. If there are lots of buyers of US government bonds, then the price goes up. And when the price of a bond goes up, its “yield” goes down. For example, a bond is issued at $100 with a 5% coupon (meaning an investor that owns that bond gets paid $5 per year). If there are lots of buyers, the price of that bond might go up to $105 – but the coupon stays at 5$. That means that whoever buys the bond at $105 gets paid a “yield” of 4.76% (5/105). And that new “yield” is, effectively, the current interest rate of that bond.

Government Bonds (Government Borrowing)

Almost all governments borrow money to fund their operations (e.g. borrowing money to build a bridge; it then pays the interest with tax income). Governments usually borrow money by issuing bonds to investors. If a government borrows in its local currency, it’s unlikely that they will ever not pay it back (e.g. default on it), because they can simply print more money. However, the value of their currency is a concern to potential investors. If a US investor lends Zimbabwe $1 million Zimbabwean dollars, she will almost certainly get paid back. But if Zimbabwe’s currency has plummeted in value in the meantime, then the $1 million Zimbabwean dollars that the investor gets back will be worth a lot less to them in US dollar terms (and so that would be a bad return for them). Governments do borrow money in currencies other than their own sometimes (like US dollars), especially emerging market countries. The ability of the country to pay back that money becomes the main risk for investors.

Government Borrowing And Inflation

All else being equal, the more money a government borrows, the more likely it is that inflation in that country will increase in the future. That’s because the government will eventually have to pay back the money it’s borrowed. It can do this by either reducing its spending (expenses) and/or raising its taxes (income) – or it can print new money. The first option, cutting spending or increasing taxes, is typically negative for the demand for money. Both of those measures slow economic growth and thus reduce people’s and companies’ need for money (since demand for money falls if people are less keen to invest or spend in an economy). The other alternative, creating new money, increases the supply of money in the economy. There is simply more money available. The rules of supply and demand apply to money as they do anything else: when demand for it goes down and/or when its supply increases, its value falls – i.e. it can buy fewer goods and services – which is exactly what happens to money when inflation is higher; they’re one and the same. Thus, higher government borrowing eventually creates the same circumstances erode the value of money – and increases inflation.

Gross Domestic Product (GDP)

GDP is actually a very simple term that’s often made to sound complicated. It’s simply the size of a country’s economy – and it’s measured by the total amount of goods produced and services provided within that economy. And, therefore, GDP growth and economic growth are, essentially, the same thing.

Hedge

A hedge is an investment that, to some degree, offsets another investment. So, if an investor wants to buy the stock of a Japanese company but doesn’t want any exposure to the Japanese Yen, then the investor could buy the stock but create a hedge by entering another investment whereby they agree to sell Yen at some point in the future. The investor would thus be exposed only to stock price move and not the value of the Yen (in theory, at least).

Hedge Fund

The term hedge fund has become very broad, but it usually refers to funds that try to make money no matter what the overall markets do. They do this, usually, by employing strategies that can bet on various different types of things (like stocks, bonds, currencies and interest rates) and do so by setting themselves up to profit when such things go up or down in value. This contrasts with, for example, a traditional fund that can only buy stocks (and can’t set themselves to profit when stocks go down, e.g. by “going short”). Such a fund, typically, is much more exposed to broad movement of the markets (called “beta”). Hedge funds should be primarily exposed to “alpha,” which means that they “neutral” to the overall market.

Hostile Takeover

It’s when one company is acquired by another against the wishes of the target’s board of directors and existing management. It is usually achieved by the acquiring company appealing directly to the target’s shareholders, who may vote in a new board of directors or otherwise take action to allow the takeover to go through.

How Interest Rates Affect Bonds And Stocks

If investors think they’ll be paid 5% interest next year but bonds right now only pay 2% interest, they’ll sell bonds today and wait until next year to buy new ones. As a result, bonds that are currently in the market go down in price when interest rates look like they’re going up. Higher interest rates make it more expensive for people and companies to borrow money (which they then spend on things), slowing down economic growth. But this negative effect can be offset by an economy that grows strongly despite rising rates. Another consideration is that higher interest rates make new bonds appear a relatively more attractive investment compared to stocks. If investors can get paid 5% per year for owning a relatively safe government bond, they might choose to do that rather than choosing to own a stock – the value of which could fall, and has no guarantee of a return. So investors, on the whole, tend to shift some money away from stocks (after the bonds have sold off in price). An environment in which interest rates are going up is not necessarily a bad one for stocks – it just can make things a little more difficult for some.

How Interest Rates Affect Currencies

If an investor can lend money to one of the following; a German willing to pay 0.5% per year in interest, an American willing to pay 1% per year in interest. The choice is simple – to receive the most interest, they’d choose the American. To do that, they’d first have to buy US dollars in order to lend them to the American. If several investors do that, it’ll drive up the value of the dollar. Money is like anything else in that when there is too much supply, its price goes down (and its price is reflected by its interest rate). If all the money flooding into America causes interest rates to fall, the picture could look like this; a German willing to pay 0.5% per year in interest, an American willing to pay 0.25% per year in interest. Investors, naturally, would want the American to pay them back (in reality, they’d sell that “bond” on to someone else), and sell those dollars and buy euros in order to lend to the German. Lower American interest rates effectively pushed down the value of the dollar, and vice versa for the euro, all else being equal (there are other things that affect the value of a currency, like inflation).

Import

Goods/services that are bought from a company in a foreign country. For example, when America buys Canadian lumber, it is “importing” it. Imports contribute negatively to the size of a country’s economy because the money that is paying for the good/service is leaving the country.