The Finance Dictionary

This information provides users with thorough and reliable meanings to all the most common, and even uncommon, financial terms

Financial Terms Beginning With The Letter I

Immediate life annuity

See life annuity.

In the money

A call option is in the money when the share price is above the strike price.

A put option is in the money when the share price is below the strike price.

Income statement

An income statement is part of the financial statements of a business. The income statement reports the net income of the business for a period of time, showing the totals for sales, costs of sales, operating expenses, general and administrative expenses, interest expense, income tax expense, and extraordinary expenses. The financial statements of a business are normally prepared monthly, although some small businesses or proprietorships may prepare them less often. Publicly traded corporations normally publish their financial statements quarterly and annually.

Income trust

An income trust is an unincorporated business entity which pays little or no income tax by flowing earnings through to unitholders (holders of trust units). The trust units trade on stock exchanges. The tax situation for some income trusts is changing due to changes announced by the federal government in October 2006.

Index

A stock index is a statistical tool which provides the value of a group of securities. For instance, the Dow Jones Industrial Average is an index which is made up of 30 U.S. industrial companies, and provides a benchmark which reflects the health of the U.S. economy.

Index-linked GIC

This is a GIC which is linked to a stock index, and is usually guaranteed to return all of your original investment. The income is taxed as interest, not capital gains, so these are more suitable to be held inside a registered account such as an RRSP, RRIF, etc.

Input tax credit

An input tax credit can be claimed to recover GST/HST which has been paid by a GST registrant. The input tax credit is usually the amount of GST/HST paid. There are special rules for some situations, such as when capital personal property, capital real property, passenger vehicles or aircraft are purchased.

Insider

An insider is a director, officer, or large shareholder (more than 10%) who can be presumed to have access to privileged information of the company.

Intangible asset

An asset having no physical substance, such as goodwill, trademarks, and patents. Note that beginning in 2002, corporations are no longer required to amortize the cost of their intangible assets every year. Intangible assets are recorded at cost on the balance sheet. That cost must be reviewed annually to determine if its current value is less than cost, in which case the value would be written down on the balance sheet. Due to this change in accounting rules, corporate net earnings will likely be increased over prior years, as will earnings per share.

Interest coverage

Also called times interest earned, interest coverage reflects the ability of the company to pay its interest. It is calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense. If the result of this calculation is 2, it means that the company's operating earnings are 2x its interest expense.

Interest rate sensitive

When an investment is interest rate sensitive, its value will fall as interest rates rise. Most stocks are interest rate sensitive, but some, like financials and utilities, are more sensitive than others, such as consumer stocks and commodities.

Interest rates

The nominal rate is the annual interest rate before adjusting for the effect of compounding. When an interest rate is stated with its compounding frequency (e.g. 6% compounded monthly), the stated rate is the nominal rate.

The effective rate is the annual interest rate after adjusting for the effect of compounding.

Compound interest is interest on interest. The more frequent the compounding, the higher the interest.

Interest earned on chequing and savings accounts is usually calculated on the balance in the account at the end of each day, but is paid monthly, therefore it is compounded monthly.

Interest earned on term deposits and guaranteed investment certificates (GICs) are compounded at various frequencies. When you are investing in these products, make sure you compare the effective rates of different options, not the nominal rate.

Mortgage interest is usually compounded semi-annually or monthly. Payments on the mortgage can usually be paid monthly, bi-weekly, or weekly, but this does not affect the frequency of compounding.

Interest charged by Canada Revenue Agency (CRA) on overdue amounts is compounded daily.

When the term fixed rate is used in reference to a loan, it means that the rate will not change during the term of the loan. The interest rate on a variable rate loan will fluctuate every time there is a change in the bank's prime rate.

Inventory

Inventory can include goods for resale, spare parts, materials, works in progress, etc. Inventory is classified as a current asset on the balance sheet,

Inventory turnover

The inventory turnover ratio is calculated as

cost of goods sold
average inventory

Inventory turnover can be determined 2 different ways:

  • Add together the inventory balances from the beginning of the year and the end of the year, and divide by 2
  • Add together the inventory totals from the end of each month, and divide by 12. This is a better way of calculating the ratio.

Generally, the higher the inventory turnover the better. If the ratio is too low, or is decreasing, it means that more of the company funds are being tied up in inventory, and items in inventory could be becoming outdated. In a business where prices are consistently dropping and products are constantly changing, such as computer hardware, it is wise to turn over the inventory as frequently as possible. This has to be balanced against running short of inventory and losing sales as a result.

Investment company

This is a company which is primarily engaged in the business of investing in securities. There are several kinds of investment companies:

1. Mutual funds, also know as open-end funds
2. Closed-end funds, and
3. Unit investment trusts (UITs)
4. Exchange-traded funds (ETFs)

The shares of mutual funds and UITs are redeemable. Investors buy and sell the shares from and to the fund company at net asset value (NAV) per share at the end of the day.

Shares of closed-end funds and exchange-traded funds are traded on a stock exchange, at their market value.

UITs have a termination date at which time the fund will be liquidated, and proceeds are paid out to the investors.

Both closed-end funds and UITs have a fixed number of shares. Open-end funds and exchange-traded funds have a variable number of shares.