midterm 1 Flashcards
compounding interest
the continual addition of interest to the original principal sum of a loan or deposit, often referred to as interest on interest
compounding period
the period between points in time when interest is paid or added to the principal
consumer price index (CPI)
a measure that examines the weighted average of prices of a basket of consumer goods and services such as transportation, food, and medical care
discount rate
the interest rate used to determine the present value of future cash inflows, value; may derive from several sources, such as stated contract rates, costs to borrow, or expected rates of return on investments
financial instrument
an asset or bundle of assets, including monetary contracts between parties, that can be bought, sold, or traded for financial gain
financial risk
the possibility of losing money or purchasing power on an investment, business transaction, or venture or simply due to inflation
future value
the value that a current amount will grow to at a given interest rate over a given period of time
growth rate
the percentage increase of a specific variable within a specific time period; synonymous with interest rate in the context of the time value of money
interest
the amount of money that is paid by a borrower to a lender for the use of their money, typically calculated from an annualized rate
investment
an asset or item acquired with the goal of generating financial gain through increased income or appreciation in value
liquid asset
an asset that can be readily converted into cash within a short period of time
present value
the current value of a future amount, calculated by discounting the future value back at a known discount or interest rate for a specified period of time
real interest rate
a rate of interest that has been adjusted to account for the effects of inflation
time value of money (TMV)
the concept that an amount of money is worth more today than the exact same amount of money at some point in the future
underinvested
describes an insufficient amount of investment or an investment that is earning an insufficient rate of interest
annuity
a stream of regular, periodic payments to be received or paid
annuity due
a stream of periodic payments in which the payment or receipt occurs at the beginning of each period
constant perpetuity
a stream of periodic payments that is expected to continue indefinitely with no change in thee amount paid or received
effective interest rate
the interest rate that results when compounding occurs multiple times within a year; the true cost of borrowing
growing perpetuity
a stream of periodic payments that is expected to continue indefinitely with growth of the amount paid or received in the future, usually by a fixed percentage
loan amortization
the scheduling of periodic repayment of a debt, typically involving regular payments or receipts of amounts that include both interest payment and repayment of the principal of the amount owed
ordinary annuity
a stream of periodic payments in which the payment or receipt occurs at the end of each period
preferred stock
shares of ownership in a corporation that typically entitle the holder to a fixed dividend per share, if declared by the corporation, with priority over holders of that corporation’s common stock
required rate of return
the minimum amount of return that an investor will accept on an investment given the level of risk involved
retirement planning
the process of determining one’s objectives for retirement, including one’s finances, and developing strategies and tactics to achieve them
structured settlements
monetary legal settlements that are paid out in installments, such as an annuity, rather than a lump sum cash amount
capital investment
a major expenditure that requires a large up-front investment and is expected to generate substantial cash inflow in return
cash flow
the amount of cash actually flowing into and out of a business, as opposed to income (which is based on accounting rules, accruals, and reports)
mixed stream
a set of cash flows over a period of time that can vary in amount from one period to the next
business finance
the study and application of how managers can apply financial principles to maximize the value of a firm in a risky environment
capital budgeting
the process of determining which long-term or fixed assets to acquire in an effort to maximize shareholder value
capital structure
the mix of financing, usually debt and equity, used by a firm
commercial paper (CP)
short-term, unsecured financial obligations issued by firms as a means of short-term financing for items such as inventory or payables
default risk
the risk that the issuer of a financial security will be unable to make payments as specified in the terms of a financial contract
diversifiable risk
also called unsystematic risk, a risk that can be eliminated without the loss of expected return by holding a portfolio of securities
inflation risk
the risk of reduced purchasing power of goods and services due to rising prices
money market
the market for short-term, low-risk, highly liquid, homogeneous financial securities; common money market securities include T-bills, NCDs, and commercial paper
money market mutual funds
created by investment companies to pool the money of many investors to purchase and then manage short-term, low-risk, liquid financial portfolios of securities
municipal bonds
long-term debt obligations issued by state or local governments that often have important tax advantages relative to corporate bonds
primary market
a term used in financial markets to identify the market for the purchase and sale of new securities
secondary market
a term used in financial markets to represent the purchase or sale of used securities that trade after the initial sale by the offering firm
treasury bonds
long-term debt obligations issued by the US government characterized by having maturities of greater than 10 years and making periodic interest payments as well as principal payment at maturity
treasury notes
long-term debt obligations issued by the US government characterized by having maturities of 2 to 10 years and making periodic interest payment as well as principal payment at maturity
agency theory
a principle that is used to explain and resolve issues in the relationship between business principals and their agents, most commonly between shareholders (principals) and company executives (agents)
annual meeting
a meeting of the general membership and shareholders of a corporation; also known as an annual general meeting (AGM)
annual report
a document describing a public corporation’s operations and financial condition that must be provided to shareholders once per year; also known as Securities and Exchange Commission (SEC) Form 10-K
C corporation
a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity
close (closely held) corporation
a company that has only a limited number of shareholders
corporation
a legal entity that is separate and distinct from its owners
ESG
environmental, social, and governance (ESG) standards for a company’s operations that socially conscious investors use to screen potential investments
hybrid form of business
a limited liability company (LLC) or limited liability partnership (LLP) that combines the characteristics of a corporation with those of a sole proprietorship or partnership
limited liability corporation (LLC)
a US-specific form of a private limited company; a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation
limited liability partnership (LLP)
a partnership in which some or all partners have limited liabilities; can exhibit elements of both partnerships and corporations
non-stock corporation
a corporation that does not have owners represented by shares of stock but typically has members who are the functional equivalent of stockholders in a stock corporation (having the right to vote, etc.); describes the vast majority of not-for-profit corporations
shareholder/stockholder
an individual or institution that legally owns one or more shares of the share capital of a public or private corporation; may be referred to as members of a corporation
stakeholder
a person with an interest or concern in a business
stock corporation
a for-profit organization that issues shares of stock to shareholders (also known as stockholders) to raise capital, with each share representing partial ownership of the corporation and granting shareholders certain ownership rights to shape company policies
bond call
a feature of certain bonds or other fixed-income instruments that allows the issuer to repurchase and retire these instruments before maturity
bond price
the present, discounted value of the future cash stream generated by a bond; the sum of the present values of all likely coupon payments and the present value of the par value at maturity
bond ratings
grades assigned to bonds by rating services that indicate their overall credit quality
call risk
the risk that a bond issuer will redeem a callable bond prior to maturity
cash rate
the interest rate that a central bank, such as the Reserve Bank of Australia or the US Federal Reserve System, will charge commercial banks for loans; also known as the bank rate or the base interest rate
convertible bonds
fixed-income corporate debt securities that yield interest payments but can be converted into a predetermined number of common stock or equity shares
coupon payment
the periodic dollar value of interest that is paid to a bondholder by the bond issuer
coupon rate
the amount of annual interest paid by the bond issuer; is multiplied by the face value of a bond to determine annual interest or coupon payment amounts
credit risk
the risk taken by a bond investor that the bond issuer will default by failing to pay interest and repay the principal on schedule
deep discount bonds
bonds that sell at significantly lower values than their par values
default
when an issuer fails to make scheduled interest or principal payments on its bonds
default risk
the risk taken by investors that payments will be delayed or will not occur
discount bond
a bond currently trading for less than its par value in the secondary market; offers a coupon rate that is lower than prevailing interest rates
duration
a measure of how much bond prices are likely to change if and when interest rates move
duration risk
the risk associated with the sensitivity of a bond’s price to a 1% change in interest rates
interest rate risk
the risk of investment losses that result from changes in interest rates
investment grade
describes a municipal or corporate bond with a rating that indicates it presents a low risk of default
junk bonds
bonds that have been given a low credit rating, below investment grade; riskier than other bonds due to a greater chance that the issuer will default or experience a credit event
liquidity risk
risk that stems from the lack of marketability of an investment, meaning that it cannot be bought or sold quickly enough to prevent or minimize a loss
mautrity date
the date on which a bondholder ceases to receive interest payments on a bond investment and instead is repaid its par, or face, value
par value
also called the face amount or face value; the value written on the front of the bond, which is the amount of money that bond issuers promise to be paid at maturity
premium bond
a bond that is trading above its par value in the secondary market; offers a coupon rate that is higher than the current prevailing interest rates being offered
prime rate
the interest rate that banks charge creditworthy corporate customers; among the most widely used benchmarks for setting home equity lines of credit and credit card rates, based on the federal funds rate set by the Federal Reserve
rating agencies
independent service agencies, such as Fitch, Moody’s, or Standard & Poor’s, that perform the isolated function of credit risk evaluation
realized return
the actual return that an investor earns over a given time period through the buying and selling of a security
reinvestment risk
the risk that an investor will be unable to reinvest cash flows received from an investment (e.g., coupon payments or interest) at a rate comparable to their current rate of return
savings bonds
debt securities purchased by investors, as a personal investments or as gifts, that the US government issues to pay for certain public or government programs
yield curve
a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates; gives an idea of future interest rate changes and economic activity
yield to maturity
the total return anticipated on a bond if the investment is held until maturity
zero-coupon bonds
bonds that are issued at a deep discount from face value and offer no interest or coupon payments
amortization
the process of spreading business costs in accounting; similar to depreciation, but differs in that it generally refers to intangible assets such as patents or copyrights
common stock
a security that represents partial ownership of a corporation
comparable company analysis
a method for valuating a company using the metrics of other businesses of similar size in the same industry
depreciation
the process of spreading business costs in accounting; similar to amortization, but differs in that it generally refers to fixed, tangible assets such as buildings, machinery, furniture, fixtures, and equipment
discounted cash flow (DCF)
a method for estimating the value of an investment based on the present value of its expected future cash flows
dividend
a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits or reserves
dividend discount model (DDM)
a quantitative method for predicting the price of a company’s stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value
dividend yield
a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price, expressed as a percentage
earnings per share
the ratio of a company’s profits to the outstanding shares of its common stock; serves as an indicator of a company’s profitability
EBIT
short for earnings before interest and taxes; an indicator of a firm’s profitability before the effects of interest or taxes; also referred to as operating earnings, operating profit, and profit before interest and tax
efficient markets
markets in which costs are minimal and prices are current, fair, and reflective of all available relevant information
enterprise value (EV)
a company’s total value; often used as a more comprehensive alternative to equity market capitalization
enterprise value (EV) multiples
also known as company value multiples; ratios used to determine the overall value of a company and, by extension, the value of its common stock
equity multiples
metrics that calculate the expected or achieved total return on an initial investment
gordon growth model
a methodology used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate
intangible assets
assets that are not physical in nature, such as goodwill, brand recognition, and intellectual property (i.e., patents, trademarks, and copyrights)
intrinsic value
the value of a firm’s stock based entirely on internal factors, such as products, management, and the strength of company brands in the marketplace
market capitalization
the value of a company traded on the stock market, calculated by multiplying the total number of shares by the current share price
preferred stock
stock that entitles the holder to a fixed dividend, the payment of which takes priority over payment of common stock dividends
price-to-book (P/B) ratio
also called the market-to-book (M/B) ratio; a metric used to compare a company’s market capitalization, or market value, to its book value
price-to-cash-flow (P/CF) ratio
a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share
price-to-earnings (P/E) ratio
a ratio that indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings
price-to-sales (P/S) ratio
a ratio that indicates how much investors are willing to pay for a company’s stock per dollar of that company’s sales
goals of financials mgmt
-beat the competition
-maximize sales of market share
-minimize costs
-maximize profits
legal firms for companies
-sole proprietorships
-partnerships
-corporations
-and hybrid form
advantages of a sole proprietorship
-simple and cheapest form of starting a business
-few gov’t regulations
-no corporate income tax
-all profits are taxed as individual income
disadvantages of a sole proprietorship
-unlimited liability for the owner
-limited to the life of the owner
-difficult to obtain large amounts of funding
advantages of a partnership
-easily and inexpensively formed
-few gov’t regulations
-no corporate income taxes; tax on an individual basis
disadvantages of a partnership
-unlimited liability for general partners
-difficult to obtain large amounts of capital
