Definitions Flashcards
Compound interest
The situation in which interest paid on an investment
during the first period is added to the principal.
During the second period, interest is earned on
the original principal plus the interest earned
during the first period.
Future value
The amount to which your investment will grow, or a future dollar amount
Future value factor
The value of (1 + r)^n used as a multiple to calculate an
amount’s future value.
Simple interest
If you only earned interest on your initial investment, it would be referred to as simple interest.
Present value
The value in today’s dollars of a future payment discounted back to present at the required rate of return.
Present value factor
The value of 1 / (1 + r)^n used as a multiplier to calculate an amount’s present value.
Annuity
A series of equal dollar payments made for a specified number of years.
Ordinary annuity
An annuity where the cash flows occur at the end of each period.
Compound annuity
Depositing an equal sum of money at the end of each year for a certain number of years and allowing it to grow.
Annuity future value factor
The value of [(1 + r)^n - 1 / r ] used as a multiplier to
calculate the future value of an annuity.
Annuity present value factor
The value of [1 - (1 + r)^-n / r ] used as a multiplier
to calculate the present value of an annuity
Annuity due
An annuity in which the payments occur at the beginning of each period.
Amortized loan
A loan that is paid off in equal periodic payments.
Effective annual rate (EAR)
The annual compound rate that produces the same
return as the nominal, or quoted, rate when something is compounded on a nonannual basis. In effect, the EAR provides the true rate of return.
Perpetuity
An annuity with an infinite life.
Incremental Cash Flow
The difference
between the cash flows a company will produce both with and without the investment it is thinking about making.
Opportunity cost,
The cost of making
a choice in terms of the next best alternative that must be foregone.
Efficient market
A market in which
the prices of securities at any instant in time fully reflect all publicly available information about the securities and their actual public values.
Agency problem
Problems and conflicts resulting from the separation of the
management and ownership of the firm.
Capital budgeting
The process of
decision making with respect to investments
made in fixed assets; that is, should a proposed project be accepted or rejected?
Capital structure decision
The
decision-making process with funding choices and the mix of long-term sources of funds.
Working capital management
The
management of the firm’s current assets and short-term financing.
Financial markets
Those institutions
and procedures that facilitate transactions
in all types of financial claims.
Sole proprietorship
A business owned by a single individual.