March 2016 Flashcards
Swap
A swap is a derivative contract through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount that both parties agree to.
The most common type of swap is an interest rate swap. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter contracts between businesses or financial institutions.
Net Present Value (NPV)
NPV is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project.
Yield To Maturity (YTM)
Yield to maturity is the total return anticipated on a bond if the bond is held until the end of its lifetime. Yield to maturity is considered a long-term bond yield, but is expressed as an annual rate. In other words, it is the internal rate of return of an investment in a bond if the investor holds the bond until maturity and if all payments are made as scheduled.
Junk Bond
A junk bond is a colloqial term for a high-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of ‘BB’ or lower by Standard & Poor’s, or ‘Ba’ or below by Moody’s. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.
Discounted Cash Flow (DCF)
A discounted cash flow is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment.
Capital Expenditure (CAPEX)
Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations.
Return on Capital Employed (ROCE)
Return on capital employed is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed.
ROCE = Earnings before Interest and Tax / Capital Employed
Amortization
1) Amortisation is the paying off of debt with a fixed repayment schedule in regular instalments over a period of time.
2) The spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset’s useful life) for accounting and tax purposes.
Operating Margin
Operating margin is a margin ratio used to measure a company’s pricing strategy and operating efficiency. Operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc.
Opportunity Cost
1) An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.
2) The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%.
Political Risk
The risk that an investment’s returns could suffer as a result of political changes or instability in a country.
Hedge
A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in related security, such as a futures contract.
Foreign Aid
Foreign aid is money that one country voluntarily transfers to another, which can take the form of a gift, a grant or a loan. In the United States, the term usually refers only to military and economic assistance the federal government gives to other governments.
Intangible Asset
An intangible asset is an asset that is not physical in nature. Corporate intellectual property, goodwill and brand recognition are all common intangible assets in today’s marketplace.
