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Financial Glossary – L


Laffer Curve – a graph that suggests that as you increase tax rates, government revenue rises, but begins to fall beyond a certain point. In other words, if you raise taxes too high, people and companies become less interested in working and investing, or move their activities abroad, which leads to less tax income for the government and a weaker economy. The Laffer Curve was drawn by economist Arthur Laffer in a restaurant in 1974 while he explained his point of view to his dinner companions.

Laissez-Faire – an economic system in which the business activities of and between private citizens, companies and other entities are free from government interference such as subsidies, tariffs, privileges and regulations. It means the same as a free-market system or pure capitalism. The emphasis is on the government having a hands-off approach.

Last In, First Out (LIFO) – an accounting and valuation technique that the newest assets to be added to inventory are the first ones to be sold or used, while the older ones are the last ones to be sold.

Layoff – the suspension or permanent termination of a position (job) in a company. The verb is ‘to lay off’. When a worker is laid off, he or she has done nothing wrong – it is not their fault. Layoff, when it is permanent, means the same as redundancy. It can happen if sales decline, during a recession, the business goes bankrupt, or it cannot produce goods because it cannot get a vital component or raw material.

Leading indicators – indicators that usually change before the whole economy changes. They are used as short-term predictors of the economy. Stock market returns – a leading indicator – usually start to decline before the general economy weakens, and pick up just before the economy starts recovering from a slump. Other examples of leading indicators include building permits, the money supply, and consumer confidence.

Legacy System – a computer term that refers to an obsolete IT system in a company. It is also called a legacy platform. The term is pejorative that refers to an out-of-date computer system or application program. When ‘legacy system’ is mentioned, the speaker is suggesting that the company or organization’s computer system needs to be replaced.

Lender of Last Resort – when a bank needs money and no other bank or entity can or is willing to lend to it, the lender of last resort – usually a central bank – intervenes and supplies the required funds. This happens when a commercial bank is in trouble. The central bank often lends with strings attached; it may take control of the financial institution, find it a new owner, or close it down. The function of the lender of last resort is to: 1. Prevent the bank from failing. 2. To protect the country’s financial system.

Letter of Credit – a document from a bank saying that it guarantees payment to the exporter, as long as it meets a list of conditions. If the importer fails to pay, the bank pays. Also known as documentary credit.

Leverage – the ratio between equity capital and credit in a financial exchange. Typically, it means using borrowed money to fund the purchase of an asset.

Liability – in accounting a liability is a legal debt or obligation that a company or other entity is required to pay back. Liabilities are reported on the right side of a balance sheet.

Libor – also known as the London Interbank Offered Rate or ICE Libor, is the rate at which banks offer to lend wholesale money to other financial institutions in the international interbank market.

Life Insurance – a contract made between an individual and an insurance company. The person being insured pays a premium in return for a lump-sum payment  (“a death benefit”)  to a designated beneficiary following the their death. Cover may either be temporary or permanent.

Limited Company – a business entity we can set up to run our business. It is responsible in its own right for all its activities. Its finances are separate from the personal finances of those who own shares in it. Profit made (after paying tax) is owned by the company. A limited company can pay dividends to shareholders from its net profit. There are two main types: 1. Private Limited Company. 2. Public Limited Company.

Line of Credit – or credit line, is the amount you can borrow on a flexible loan. In other words, your credit limit. We also call it a revolving credit agreement or bank line. You only borrow what you need, as long as you remain within your limit. You only pay interest on what you borrowed.

Liquid Assets – current assets that can be quickly turned into cash (usually within a period of a month). Cash and checking accounts are the ‘most liquid’ of assets.

Liquidity – refers to how rapidly an asset can be converted into cash and spent, if so desired. Cash is the most liquid of all assets. In accounting, liquidity is a measure of an entity’s ability to pay its bills as they come due, as well as its ability to access money when it needs it. The term also refers to how much activity there is in a market. A liquid market has many buyers and sellers.

Liquidity Trap – a situation in which cash injections from the central bank into the private banking system to decrease interest rates and thus kick-start the economy have no effect. The aim of the cash injections is to get people and companies to borrow and thus spend more. However, for some reason everybody wants to hoard cash and are risk averse. The USA and UK experienced a liquidity trap during the Great Depression of the 1930s, and so did Japan in the 1990s.

Loan – something that is borrowed (usually in the form of money or property) that is eventually paid back to the lender with interest. There are many types of loans, such as a mortgage, which is money borrowed to buy a property.

Loan Capital – money that a company borrows from banks, other organizations and people for an agreed period on which it pays interest. The most common ways to raise loan capital are with a bank loan, a bank overdraft or debentures.

Loan Guarantee – this is a loan where a person, government or other entity pledges to become liable for a debtor’s debt obligation in the event of a default.

Loan Modification – changes that are made to an existing mortgage loan, due to the borrower’s long-term inability to pay. It is not the same as a refinance.

Loan Shark – a moneylender who charges exorbitant rates of interest. Many of them work outside the law, threaten borrowers with violence, and sometimes force defaulters into criminal activities.

Loan to Value Ratio (LTV Ratio) – calculates the risk of people who want to borrow money. The LTV ratio is commonly used by banks and financial institutions. The greater the LTR ratio, the higher the risk.

Logistics – a subset of supply chain management that focuses on the challenge of planning and coordinating the flow of information and materials, all the way from purchasing raw materials, making the product, storing it, right through to delivering to customers.

Luxuries – goods or services that are not necessary for living, but are highly-desired by consumers. They are more expensive than ‘normal’ or cheap items. People’s ability to buy or finance luxuries is directly proportionate to their assets or income. Rich people purchase luxuries more often than individuals further down the socioeconomic ladder. ‘Little luxuries’ are simple things that can make somebody happy, such as a quiet evening watching TV with a glass of wine and some chocolates while the children spend the night away at their grandparents’.