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107 Cards in this Set
 Front
 Back
zero coupon bond

A bond that makes no coupon payments* thus initially priced at a deep discount.


yield to maturity (YTM)

The rate required in the market on a bond.


weighted average cost of capital (WACC)

The weighted average of the cost of equity and the aftertax cost of debt.


variance

The average squared difference between the actual return and the average return.


unsystematic risk

A risk that affects at most a small number of assets. Also* unique or assetspecific risk.


Treasury yield curve

A plot of the yields on Treasury notes and bonds relative to maturity.


term structure of interest rates

The relationship between nominal interest rates on defaultfree* pure discount securities and time to maturity; that is* the pure time value of money.


taxability premium

The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.


systematic risk

A risk that influences a large number of assets. Also* market risk.


systematic risk principle

The expected return on a risky asset depends only on that asset's systematic risk.


SuperDOT system

An electronic NYSE system allowing orders to be transmitted directly to the specialist.


sunk cost

A cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision.


straight voting

A procedure in which a shareholder may cast all votes for each member of the board of directors.


stated interest rate

The interest rate expressed in terms of the interest payment made each period. Also* quoted interest rate.


standard deviation

The positive square root of the variance.


standalone principle

The assumption that evaluation of a project may be based on the project's incremental cash flows.


specialist's post

A fixed place on the exchange floor where the specialist operates.


specialist

A NYSE member acting as a dealer in a small number of securities on the exchange floor; often called a market maker.


sinking fund

An account managed by the bond trustee for early bond redemption.


security market line (SML)

A positively sloped straight line displaying the relationship between expected return and beta.


secondary market

The market in which previously issued securities are traded among investors.


risk premium

The excess return required from an investment in a risky asset over that required from a riskfree investment.


registered form

The form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record.


real rates

Interest rates or rates of return that have been adjusted for inflation.


pure play approach

The use of a WACC that is unique to a particular project* based on companies in similar lines of business.


proxy

A grant of authority by a shareholder allowing another individual to vote his/her shares.


protective covenant

A part of the indenture limiting certain actions that might be taken during the term of the loan* usually to protect the lender's interest.


profitability index (PI)

The present value of an investment's future cash flows divided by its initial cost. Also* benefitcost ratio


pro forma financial statements

Financial statements projecting future years' operations.


principle of diversification

Spreading an investment across a number of assets will eliminate some* but not all* of the risk.


primary market

The market in which new securities are originally sold to investors.


preferred stock

Stock with dividend priority over common stock* normally with a fixed dividend rate* sometimes without voting rights.


portfolio

A group of assets such as stocks and bonds held by an investor.


portfolio weight

A percentage of a portfolio's total value that is in a particular asset.


perpetuity

An annuity in which the cash flows continue forever.


payback period

The amount of time required for an investment to generate cash flows sufficient to recover its initial cost.


overthecounter (OTC) market

Securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories.


order flow

The flow of customer orders to buy and sell securities.


opportunity cost

The most valuable alternative that is given up if a particular investment is undertaken.


note

An unsecured debt* usually with a maturity under 10 years.


normal distribution

A symmetric* bellshaped frequency distribution that is completely defined by its mean and standard deviation.


nominal rates

Interest rates or rates of return that have not been adjusted for inflation.


net present value profile

A graphical representation of the relationship between an investment's NPVs and various discount rates.


net present value (NPV)

The difference between an investment's market value and its cost.


mutually exclusive investment decisions

A situation in which taking one investment prevents the taking of another.


multiple rates of return

The possibility that more than one discount rate will make the NPV of an investment zero.


member

The owner of a seat on the NYSE.


maturity

Specified date on which the principal amount of a bond is paid.


market risk premium

The slope of the SML* the difference between the expected return on a market portfolio and the riskfree rate.


liquidity premium

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.


internal rate of return (IRR)

The discount rate that makes the NPV of an investment zero.


interest rate risk premium

The compensation investors demand for bearing interest rate risk.


inside quotes

Highest bid quotes and lowest ask quotes offered by dealers for a security.


inflation premium

The portion of a nominal interest rate that represents compensation for expected future inflation.


indenture

The written agreement between the corporation and the lender detailing the terms of the debt issue.


incremental cash flows

The difference between a firm's future cash flows with a project and those without the project.


geometric average return

The average compound return earned per year over a multiyear period.


floor traders

NYSE members who trade for their own accounts* trying to anticipate temporary price fluctuations.


floor brokers

NYSE members who execute orders for commission brokers on a fee basis; sometimes called $2 brokers.


Fisher effect

The relationship between nominal returns* real returns* and inflation.


face value

The principal amount of a bond that is repaid at the end of the term. Also* par value.


expected return

The return on a risky asset expected in the future.


erosion

The cash flows of a new project that come at the expense of a firm's existing projects.


equivalent annual cost (EAC)

The present value of a project's costs calculated on an annual basis.


electronic communications network (ECN)

A Web site that allows investors to trade directly with each other.


efficient markets hypothesis (EMH)

The hypothesis that actual capital markets* such as the NYSE* are efficient.


efficient capital market

A market in which security prices reflect available information.


effective annual rate (EAR)

The interest rate expressed as if it were compounded once per year.


dividends

Payments by a corporation to shareholders* made in either cash or stock.


dividend yield

A stock's expected cash dividend divided by its current price.


dividend growth model

A model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate.


discounted payback period

The length of time required for an investment's discounted cash flows to equal its initial cost.


discounted cash flow (DCF) valuation

The process of valuing an investment by discounting its future cash flows.


dirty price

The price of a bond including accrued interest* also known as the full or invoice price. This is the price the buyer actually pays.


depreciation tax shield

The tax saving that results from the depreciation deduction* calculated as depreciation multiplied by the corporate tax rate.


deferred call provision

A call provision prohibiting the company from redeeming the bond prior to a certain date.


default risk premium

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.


debenture

An unsecured debt* usually with a maturity of 10 years or more.


dealer

An agent who buys and sells securities from inventory.


current yield

A bond's annual coupon divided by its price.


cumulative voting

A procedure in which a shareholder may cast all votes for one member of the board of directors.


coupon

The stated interest payment made on a bond.


coupon rate

The annual coupon divided by the face value of a bond.


cost of equity

The return that equity investors require on their investment in the firm.


cost of debt

The return that lenders require on the firm's debt.


cost of capital

The minimum required return on a new investment.


consol

A type of perpetuity.


common stock

Equity without priority for dividends or in bankruptcy.


commission brokers

NYSE members who execute customer orders to buy and sell stock transmitted to the exchange floor.


clean price

The price of a bond net of accrued interest; this is the price that is typically quoted.


capital gains yield

The dividend growth rate* or the rate at which the value of an investment grows.


capital asset pricing model (CAPM)

The equation of the SML showing the relationship between expected return and beta.


call provision

An agreement giving the corporation the option to repurchase the bond at a specified price prior to maturity.


call protected bond

A bond that* during a certain period* cannot be redeemed by the issuer.


call premium

The amount by which the call price exceeds the par value of the bond.


broker

An agent who arranges security transactions among investors.


bidask spread

The difference between the bid price and the asked price.


bid price

The price a dealer is willing to pay for a security.


beta coefficient

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset.


bearer form

The form of bond issue in which the bond is issued without record of the owner's name; payment is made to whoever holds the bond.


average accounting return (AAR)

An investment's average net income divided by its average book value.


asked price

The price a dealer is willing to take for a security.


arithmetic average return

The return earned in an average year over a multiyear period.


annuity

A level stream of cash flows for a fixed period of time.


annuity due

An annuity for which the cash flows occur at the beginning of the period.


annual percentage rate (APR)

The interest rate charged per period multiplied by the number of periods per year.


accelerated cost recovery system (ACRS)

A depreciation method under U.S. tax law allowing for the accelerated writeoff of property under various classifications.
