Lesson 3 Flashcards
individuals maximize return for a given level of risk or minimize risk if the returns are the same
Risk aversion
defined here as the uncertainty of returns. This definition encompasses the possibility of both gains and losses.
Risk
Required return of any investment=
Real Risk-free Rate + Expected Rate of inflation + Risk Premium
Related to the nature of the company’s products and its operating strategy.
Business risk (or operating risk)
refers to the risk created by the choice of capital structure the financing mix of the issuing company.
Financial risk
the combined effect of operating and financial leverage.
total risk or the degree of total leverage
affects the cash flows, operating results, financial position, and value of firms that engaged in foreign-currency-denominated transactions and more so those companies that have fully established subsidiaries in international markets
Currency or exchange rate risk
provides a low fixed rate of return but provides the convenience of availability
typical savings account
can easily deposit and withdraw from the account on any banking day
depositor
usually requires a minimum amount of deposit with a fixed term to maturity
This type of account provides a higher fixed rate of return compared to a savings and checking account
time deposit account
usually associated with the largest banks in the Philippines
Stability
provides a ranking of universal and commercial banks in the Philippines based on total assets.
BSP
have maturities of one year or less
Treasury bills
three major types of Treasury bills:
91-day, 182-day, and 364-day
have maturities longer than one year
Treasury notes (T-notes) and bonds
repaid upon maturity of the instrument
principal
short-term instruments issued by corporations for their immediate needs.
Commercial papers
long-term debt instruments issued by corporations
Corporate bonds
financial instruments that represent ownership in a corporation.
Stocks or shares
Equity securities are classified under two main categories
ordinary shares (common stocks) and preference shares (preferred stocks).
Money which is committed with an intention to earn a return over a period of time
investment
The additional return required based on the riskiness of the investment
risk premium
Risk related to the nature of the company’s products and its operating strategy
business risk
The risk created by choice of capital structure-the financing mix of the issuing company
financial risk
Provides a low fixed rate of return but allows transactions from the account any banking day
savings account
Provides a very low fixed rate of return but provides the convenience of issuing checks for payments
checking account
Government securities that have maturities of one year or less-91-day, 182-day, and 364-day securities
Treasury bills
Short-term instruments issued by the corporation for their immediate needs
commercial papers
Investors earn through dividends and capital gains
equity securities
The investment, the higher is the required rate of return by the investor
riskier
Paid first as to dividends and have seniority over claims to assets
preference shares
Computed by dividing the standard deviation of returns by the mean return
coefficient of variation
The square root of the variance
standard deviation
Long-term debt instruments issued by corporations.
corporate bonds
Deposits with banks are insured with
Philippine Deposit Insurance Corporation
