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39 terms

fin exam two terms

STUDY
PLAY
compound interest
interest paid on an investment during the first period is added to the principal.
annuity
a series of equal dollar payments made for a specified number of years
annuity due
an annuity in which the payments occur at the beginning of each period
perpetuity
an annuity with an infinite life
amortized loan
loan that is paid off in equal periodic payments
risk
potential variability in future cash flows
standard deviation
statistical measure of the spread of a probability distribution calculated by squaring the difference between each outcome and its expected value, weighting each value by its probability, summing over all possible outcomes, and taking the square root of this sum.
company unique risk
unsystematic risk: related to an investment return that can be eliminated through diversification
market risk
systematic risk: related to an investment return that cannot be eliminated through diversification
holding period returns
the return an investor would receive from holding a security for a designated period of time.
beta
relationship between an investments returns and the markets returns. this is a measure of the investments non-diversifiable risk.
portfolio beta
relationship between a portfolios returns and the market returns. measure of the portfolios non-diversifiable risk.
asset allocation
identifying and selecting the asset classes appropriate for a specific investment portfolio and determining the proportions of those assets within the portfolio
required rate of return
minimum rate of return required necessary to attract an investor to purchase or hold a security
risk premium
additional return expected for assuming risk
capital asset pricing model (CAPM)
equation stating that the expected rate of return on a project is a function of the risk-free rate, the investments systematic risk, and the expected risk premium for the market portfolio of all risky securities.
security market line
return line that reflects the attitudes of investors regarding the minimum acceptable return for a given level of systematic rick associated with a security
bond
long term (10 year or more) promissory note issued by the borrower promising to pay the owner of the security a predetermined, fixed amount of interest each year.
debenture
any unsecured long term debt
subordinated debenture
a debenture that is subordinate to other debentures in terms of its payments in case of insolvency
mortgage bond
bond secured by a lien on real property
eurobond
bond issued in a country different from the one in which the currency of the bond is denominated
zero coupon bond
bond issued at a substantial discount from its $1000 face value and that pays little or no interest
junk bond
any bond rated BB or lower
convertible bond
debt security that can be converted into a firms stock at a prespecified price
par value
on the face of the bond the stated amount that the firm is to repay upon the maturity date
coupon interest rate
the interest rate contractually owed on a bond as a percent of its par value
maturity
length of time until the bond issuer returns the par value to the bondholder and terminates the bond
call provision
provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods
indenture
legal agreement between the firm issuing bonds and the bond trustee who represents the bondholders, providing the specific terms of the loan agreement
book value
value of an asset as shown on the firms balance sheet. represents the historical cost of the asset rather than its current market value or replacement cost
liquidation value
dollar sum that could be realized if an asset were sold
market value
value observed in the marketplace
intrinsic value
present value of an assets expected future cash flows. this value is the amount the investor considers to be fair value, given the amount, timing and riskiness of future cash flows
yield to maturity
rate of return a bondholder will receive if the bond is held to maturity
current yield
the ratio f the bonds annual interest payment to its market price
interest rate risk
variability in a bonds value caused by changing interest rates.
discount bond
a bond that sells at a discount or below par value
premium bond
bond that is selling above par value