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91 Cards in this Set
- Front
- Back
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Time Line
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An important tool used in time value analysis; it is a graphical representation used to show the timing of cash flows.
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Future Value
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The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.
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Present Value
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The value today of a future cash flow or series of cash flows.
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Compounding
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The arithmetic process of determining the final value of a cash flow or series of cash flows when compounded interest is applied.
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Compound Interest
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Occurs when interest is earned on prior periods' interest.
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Simple Interest
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Occurs when interest is not earned on interest.
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Opportunity Cost
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The rate of return you could earn on an alternative investment of similiar risk.
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Discounting
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The process of finding the present value of a cash flow or series of cash flows: discounting is the reverse of compounding.
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Annuity
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A series of equal payments at fixed intervals for a specified number of periods.
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Ordinary Anwnuity
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An annuity whose payment occur at the end of each period.
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Annuity Due
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An annuity whose payments occur at the beginning of each period.
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FVAn
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The future value of an annuity of N periods.
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PVAn
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The present value of an annuity of N periods.
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Perpetuity
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A stream of equal payments at fixed intervals expected to continue forever.
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Uneven Cash Flows
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A series of cash flows where the amount varies from one period to the next.
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Payment
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This term designates equal cash flows coming at regular intervals.
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Cash Flow
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This term designates a cash flow that's not part of an annuity.
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Annual Compounding
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The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added once a year.
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Semi-Annual Compounding
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The arithmetic process of determining the final value of the a cash flow or series of cash flows when interest is added twice a year.
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Nominal (Quoted or stated) Interest Rate
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The contracted (or quoted) interest rate.
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Annual Percentage Rate
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The periodic rate times the number of periods per year.
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Effective (Equivalent) Annual Rate (EFF%)
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The annual rate of interest actually being earned, as opposed to the quoted rate. Also called the "equivalent annual rate."
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Amortized Loan
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A loan that is repaid in equal payments over its life.
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Amortization Schedule
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A table showing precisely how the loan will be repaid. It gives the required payment on each payment date and a breakdown of the payment showing how much interest and how much is repayment of principle.
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Bond
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Is a long term contract under which a borrower agrees to make payments of interest and principle on specific dates to the holders of the bond.
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Treasury Bonds
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Issued by the federal government, sometimes referred to as a government bond.
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Corporate Bonds
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Bonds issued by state and local governments.
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Foregin Bonds
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Bonds issued by foreign governments.
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Par Value
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The face value of a bond.
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Coupon payment
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The specified number of dollars of interest paid each year.
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Coupon Interest rate
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The stated annual interest rate on a bond.
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Fixed rate bond
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A bond whose interest rate is fixed for its entire life.
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Floating Rate Bond
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A bond whose interest rate fluctuates with shifts in the general level of interest rates.
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Zero coupon bond
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A bond that pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation.
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Original Issue Discount Bond
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Any bond originally offered at a price below its par value.
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Maturity Date
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A specified date on which the par value of a bond must be repaid.
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Bond
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Is a long term contract under which a borrower agrees to make payments of interest and principle on specific dates to the holders of the bond.
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Treasury Bonds
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Bonds issued by the federal government, sometimes referred to as government bonds. Tend to have a low default risk, but price can decline when interest rates rise.
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Corporate Bonds
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Bonds issued by corporations that tend to be exposed to default risk-if issuing company gets into trouble. Default risk is often referred to credit risk.
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Municipal Bonds
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Bonds issued by the state and local government. These bonds are also subject to default risk. Interest on these bonds is exempt from federal taxes and states if the purchasers lives in the same state of the issued bond.
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Foreign Bonds
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Are issued by foreign governments or foreign corporations. These bonds have similar risks of default, especially corporate bonds, and because of the instability of foreign governments and changes in the value of money can make the price decline.
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Par Value
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The face value of the bond.
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Coupon Payment
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The specified number of dollars of interest paid each year.
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Coupon Interest Rate
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The stated annual interest rate on a bond.
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Fixed Rate Bond
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A bond whose interest rate is fixed for its entire life.
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Floating rate bond
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A bond whose interest rate fluctuates with shifts in the general level of interest rates.
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Zero Coupon Bond
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A bond that pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation.
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Original Issue Discount Bond
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Any bond originally offered at a price below its par value.
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Maturity Date
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A specified date on which the par value of the bond must be repaid.
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Original Maturity
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The number of years to maturity at the time a bond is issued. However, the effective maturity decreases with each passing year.
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Call Provision
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A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.
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Sinking Fund Provision
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A provision in a bond contract that requires the issuer to retire a portion of the bond issue each year.
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Convertible Bond
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A bond that is exchangeable at the option of the holder for the issuing firm's common stock.
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Warrant
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A long term option to buy a stated number of shares of common stock at a specified price.
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Putable Bond
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A bond with a provision that allows its investors to sell it back to the company prior to maturity at a prearranged price.
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Income Bond
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A bond that pays interest only if it is earned.
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Indexed (purchasing power) bond
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A bond that has interest payments based on an inflation index so as to protect the holder from inflation. U.S. treasury is the main issuer of indexed bonds.
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Discount Bond
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A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate.
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Premium Bond
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A bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate.
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Yield to Maturity (YTM)
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The rate of return earned on a bond if it is held to maturity.
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Yield to Call (YTC)
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The rate of return earned on a bond when it is called before its maturity date.
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Price (interest rate) Risk
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The risk of a decline in a bond's price due to an increase in interest rates.
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Reinvestment Risk
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The risk that a decline in interest rates will lead to a decline in income from a bond portfolio.
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Investment Horizon
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The period of time an investor plans to hold a particular investment.
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Duration
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The weighted average of the time it takes to receive each of the bond's cash flows.
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Mortgage bond
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A bond backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds. The issuing corporation pledges specific assets as security for the bond.
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Indenture
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A formal agreement between the issuer and the bondholders.
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Debenture
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A long-term bond that is not secured by a mortgage on specific property.
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Subordinated Debenture
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A bond having a claim on assets only after the senior debt has been paid in full in the event of liquidation.
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Investment-Grade Bond
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Bonds rated BBB or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds.
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Junk Bond
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A high-risk, high-yield bond.
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Proxy
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A document giving one person the authority to act for another,typically the power to vote shares of common stock.
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Proxy fight
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An attempt by a person or group to gain control of a firm by getting its stockholders to grant that person or group the authority to vote its shares to replace the current management.
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Takeover
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An action whereby a person or group succeeds in ousting a firm's management and taking control of the company.
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Preemptive fight
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A provision in the corporate chatter or bylaws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock (or convertible securities).
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Classified Stock
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Common stock that is given a special designation such as Class A or Class B to meet special needs of the company.
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Founders' Shares
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Stock owned by the firm's founders that enables them to maintain control over the company without having to own a majority of stock.
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Marginal Investor
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A representative investor whose actions reflect the beliefs of those people who are currently trading a stock. It is the marginal investor who determines a stock's price.
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Market Price
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The price at which a stock sells in the market.
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Growth Rate
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The expected rate of growth in dividends per share
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Required Rate of Return
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The minimum rate of return on a common stock that a stockholder expects to receive in the future.
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Expected Rate of Return
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The rate of return on a common stock that a stockholder expects to receive in the future.
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Actual (realized) rate of return
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The rate of return on a common stock actually received by stockholders in some past period.
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Dividend Yield
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The expected dividend divided by the current price of a share of stock.
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Capital Gains Yield
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The capital gain during a given year divided by the beginning price.
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Expected Total Return
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The sum of the expected dividend yield and the expected capital gains yield.
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Constant Growth Model
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Used to find the value of a constant growth stock.
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Super-normal (nonconstant) growth
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The part of the firm's life cycle in which it grows much faster than the economy as a whole.
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Horizon (terminal) date
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The date when the growth rate becomes constant. At this date, it is no longer necessary to forecast the individual dividends.
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Horizon (continuing) Value
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The value at the horizon date of all dividends expected thereafter.
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Corporate Valuation Model
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A valuation model used as an alternative to the discounted dividend model to determine a firm's value, especially one with no history of dividends, or the value of a division of a larger firm. The corporate model first calculates the firm's free cash flows, then finds their PV to determine the firm's value.
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