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Finance - Most Important Definitions > Definitions > Flashcards

Definitions Flashcards

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1
Q

What is an Interest Rate?

A

rate at which we can exchange money today for money in the future

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2
Q

Financing vs Investing

A

Financing: series of payments starting with deposit |measure to cover given capital requirement | maintaining financial balance

Investment: series of payments starting with disbursement | use of financial resource and commitment | usually, initial disbursements followed by payment surpluses

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3
Q

Company | Goals and Targets (!)

A
  • securing long term existence and success
  • FIS Goals
  • Financial | making profit | increase company value | keepong solvency
  • Intrinsic | provision of exclusive services | making high quality products
  • Social | compliance with environmetnal standards | employee participation in decisions
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4
Q

More Financial Targets

A

GILSP

growth | must be able to finance growth
Independence | maintain entrepreneurial freedom
Security | managing financial risks
Liquidity
Profitability | return on invedsted capital

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5
Q

Was machen financial Managers?

A

FIC

Financial decisions
Investment Decisions
Cash Management

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6
Q

Financial statements are prepared according to…

A
  • GAAP - generally accepted accounting principles
  • and the IFRS - international financial reporting standards | these are issued by the international accounting standard board (IASB)
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7
Q

Three Rules of time Travel

1.
2.
3.

A
  1. Comparing | Combining Values only in same point of time
  2. moving forward (to the right) - compounding
  3. moving backwards (to the left) - discounting
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8
Q

What is the Time Value of Money?

A

the difference in vale between money today and money in the future

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9
Q

How to Value a Stream of Cash Flows

1.
2.

A
  1. Computing NPV of each indvidual CF
  2. then, we combine them (in FV, N-n)
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10
Q

Explain the Concept of NPV for Decision Making

A

investment decision based on cost-benefit comparison of a project

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11
Q

What is the IRR? And when do you use / need it?

A
  • it is the interest rate that sets the present value of the cash flows equal to zero
  • needed when you know the PV and CF of an investment opportunity but you do not know the interest rate that equates them
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12
Q

The Relation between Investment and Financing

1.
2.
3.

A

FTV

  1. financial: capital requirements (asset) = sources of funding (E&L)
  2. Temporal difference: duration of investment projects = time to maturity of financing measure
  3. Value creation: return on investment > financing costs
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13
Q

What is the definition of opportunity costs?

A

the opportunity cost of using a resource is the value it could have provided in its best alternative use

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14
Q

What is the APR?
When working with APRs we must

1.
2.

A

The APR is the simple interest earned in one year, i.e. the amount of interest earned without the effect of compounding

  • divide APR by the number of compounding periods per year to determine actual interest rate per compounding period
  • if CF happen at a different interval than the compounding period -> we compute appropriate discount rate by compounding
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15
Q

What does the EAR state?
Why do we need it?

A
  • it shows the actual amount of interest in percent that will be earned at the end of one year, so it is always per annuum
  • discount rate must be matched the time period of the cash flows
  • adjustment is necessary to apply FV formulas, e.g. perpetuity of annuity
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16
Q

What is a amortizing loan?

A

each months you pay interest on the loan plus some part of the loan balance

17
Q

How do you compute the outstanding loan balance?

A

its equal to the present value of the remaining future loan payments, evaluated using the loan interest rate

18
Q

We cannot use APR itself as discount rate, instead…

A

…. the APR with k compounding periods is a way of quoting the actual interest earned each compounding period

19
Q

Explain what a risk free interest rate is

A
  • for these loans, the stated interest rate is the maximum amount that investors will receive
20
Q

Explain what a competitive market is

A

market in which goods can be bought and sold ath the same time, personal preference does not matter, market price dertermines value of the good

21
Q

What does the Valuation Principle state?

A
  • states that value of an asset to a firm or its investors is determined by competitive market price
  • here the benefits and costs of a decision should be evaluated using these market prices
    -> Takeaways: decision based on market prices
22
Q

What does Arbitrage mean?

A

it is the practise of buying and selling equivalent goods in different markets to take advantage of a price difference without taking any risk

23
Q

What is special about a normal market?

A

basically is a competitive market withrout arbitrage opportunities

24
Q

What does the Law of one price state?

A

it states that if equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets

25
Q

What should you do according to the Seperation Principle?

A

in normal markets, you should evaluate the NPV of an investment decision seperately from the decision the firm makes on how to finance the investment
there is no arbitrage, so security transactions do not create nor destroy value on their own

26
Q

What are examples for financial instruments?

A

external financing: equity capital, hybrid capital (convertivle bonds, subordinated loans), borrowed capital
internal financing
internal financing: financing from sales, financing from asset restructirung

27
Q

What are the four criteria for systematizing financing forms?

A

F-C-S-L

Financing Occasion | start up financing, growth financing, refinancing, project financing

Capital transfer period | short term up to 1 year, medium term 1to 5 years

Source of funds | external and internal funding

Legal status of the owner | debt financing, equity financing, hybrid financing

28
Q

Explain what a trade credit is

1.
2.
3.
4.

A
  • extedning credit to customer and allowing customer to pay for goods at some date later than the date of purchase (for firm it creates then accounts receivable and an account payable for customer)
  • granting payment period within the terms of payment, e.g. 30 days net
  • “hidden discount” by granting cash discount
  • in essence, short-erm loan
29
Q

Why can a trade credit be an attractive source of funds?

A
  • simple and convenient to use and thus lower transaction costs than alterntive sources of funds
  • flexible and can be used as needed
  • sometimes only available source of funding for a firm
  • can be an indirect way to lower prices for certain customers who otherwise wouldnt be able to afford it
  • positive for business relationships
30
Q

What is a bilateral bank loan?

A

firm pays interest on the pricnipal loan amount and pays back the principal at maturity

31
Q

what is meant by line of credit?

A

bank agrees to lend firm any amount up to maximum available credit volme
- firm can pay back parts of utilized credit amount and can draw undrawn portion of credit line multiple times during tenor
here is a high flexbilitly to debtor

32
Q

what is meant by bridge loan?

A

bridge the gap until a firm can arrange for long-term financing

33
Q

what are commercial papers?

A
  • short-term unsecured debt used by large corporations
    usually cheaper source of funds than short term bank loan
    average maturity 30-365 days
    usually issuance under framework agreement between issuing company and dealing banks to handle the issuance process
34
Q

Definition of private debt

A

not publicly traded, often bank loan

Finance - Most Important Definitions (4 decks)

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