Definitions Flashcards
Maturity date
The date at which the principal amount of debt is repaid
Uncovered interest parity
Attempting to forecast future spot rates using the currency interest rates. No locked future rate
Require rate of return = cost of capital
The company’s estimate of the returns it needs to generate for potential providers of investment funds
Par value
Nominal value
Options
Allow you, for a premium fee, to take advantage of favourable movement of the market by buying or selling the asset at a fixed rate
Capitalised value/stock market value of a company
Current market price of a company’s listed share X number of shares
Forward rate/buy
Rate/price agreed today for delivery at an agreed future date
Internal rate of return
The discount rate at which the NPV of a project is equal to 0
Portfolio
A collection of assets
Dividend
A return to shareholders on the amount paid to the corporation
Dividend irrelevance hypothesis
Hypothesis where a pattern of dividends is irrelevant to the value of shares
Covariance
The measure indicating the extent to which two securities change in tandem
Ordinary shares
The fundamental ownership units of a corporation
Covered interest rate parity in an arbitrage relation
There isn’t enough of a difference in rates to make a profit therefore it eliminates risk
K
B
Cost to the company of providing that require rate of return
Real interest rate
Cash flows as if they are going to happen to today; inflation stripped out
Bid-offer spread
Dealer buys currency at bid rate. Sells it at an offer rate
Business risk
Risk faced by all equity-holders
Future contracts
Using a predetermined fixed rate of exchange
Average rate of return
Average profit/ average investment
Cum div
Dividend is just about to be paid (entitled to a div)
Correlation
A measure indicating how strongly two securities are related
Hedging
A process where a company tries to avoid potential exposure to any risk
FTSE 100
Financial Times stock exchange (not well diversified)
Risk averse
Someone who is reluctant to take risk and will avoid unnecessary risk
Expected return
The return an individual expects a security to earn over a period
Opportunity cost of capital
The expected rate of return offered by the other assets with the same risk as the project being evaluated
Risk premium
Extra return earned over the risk-free rate
Beta of a security
How sensitive asset i’s returns are to fluctuations in the market’s returns
Financial risk
Risk faced by all equity-holders in a geared firm
Arbitrage
The simultaneous purchase and sale of an asset to profit from a difference in price
Basis
Difference between futures prices and spot price
Discount rate
The interest rate used in discounted cash flow analysis to determine the present value of future cash flows
Spot rate/price
A Rate/price agreed today for delivery (completion of contract) today
Payback period
A period of time in a project found by counting the number of years it takes before the cumulative forecasted cash flow equals the initial investment
Efficient market
One in which asset prices rapidly incorporate all relevant information
Write
To sell a derivatives contract
Risk
Variability (std dev) is returns
Derivatives
Securities whose value is derived on the value of something else (the underlying)
Capital Asset Price Model
CAPM
Shows how the expected return on an asset is related to its beta
Book value/total equity
The total amount contributed to the corporation by equity investors
Nominal interest/ money interest
Cash flows that will actually happen, taking into account any inflation
Ex div
Div has just been paid
The market
Strictly, all risky assets, in proportion to their values
Efficient Frontier
All possible combinations of expected return and std dev in a given portfolio
