Guide to Analysing Companies

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INTRODUCTION
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02 Essential Finance 10/11/06 2:22 PM Page 179

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Inventory
A company’s merchandise; finished and unfinished products
which have yet to be sold. Such goods are assets so they can
be used as collateral or security for bank loans, which
is also called inventory financing.
Inverse yield curve
In the normal structure of interest rates, the rate for long-term
financial instruments is higher than that for short-
term ones. Plot this as a graph (rates on the vertical axis, matu-
rity on the horizontal axis) and the curve slopes upwards from
the bottom left hand corner to the top right. When there are
strong expectations that a currently high inflation rate will
soon fall rapidly, this curve can slope the other way; the longer
the maturity, the lower are the rates. Plotting this on the
graph is said to produce an inverse yield curve.
Investment bank
A bank whose main business is acting as an underwriter or
agent for companies and other institutions (for example, mu-
nicipalities or even countries) issuing debt or equity securi-
ties in order to raise money. Such banks rarely accept
deposits or make loans. Instead they charge fees for advis-
ing their clients. They usually also make markets in the securi-
ties that they have underwritten and helped to issue as well as
act as brokers or dealers in the securities markets.
Controversially, investment banks’ analysts have provided
investors with research and made recommendations about the
companies whose securities they have brought to the market.
This has led to conflicts of interest. In order to win lucra-
tive mandates from investment-banking clients, analysts were
tempted, particularly during the boom years of the late 1990s, to
write favourable recommendations about the companies they
follow. The biggest investment banks (the so-called “bulge