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ACC501 SHORT NOTES

Efficient set, of all portfolios, that provides the investor Capital Market Line :
with the best possible investment opportunities when a risk-
free asset is available. It describes the equilibrium risk-
return relationship for efficient portfolios, where the
expected return is a function of the risk-free interest rate,
the expected market risk premium, and the proportionate
risk of the efficient portfolio to the risk of the market
portfolio.
Costs of holding a commodity from one time period to Carrying costs :
another.
Payment (cash outflow) or receipt (cash inflow) of money. Cash Flow :
In this context, a marketable fixed rate debt instrument Certificate of deposit :
issued by a bank in exchange for a deposit of funds.
Interest calculated each period on the principal amount and Compound Interest :
on any interest earned on the investment up to that point.
Option on an option (e. g. an option to buy an option). Compound Option :
Takeover of a target company in an unrelated type of Conglomerate Takeover :
business.
In applying the NPV model, the net cash flows in the Consistency Principle :
numerator should be defined and measured in a way that is
consistent with the measurement of the discount rate in the
denominator.
May be used to evaluate projects of unequal lives; in this Constant Chain of
case, each project is assumed to be replaced at the end of its Replacement Assumption :
economic life by an identical project.
Credit extended to individuals by suppliers of goods and Consumer Credit :
services, or by financial institutions through credit cards.
Asset whose value depends on the value of some other Contingent Claim :
asset.

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Relationship that determines how many ordinary shares Conversion Ratio :
will be received in exchange for each convertible or
converting security when the conversion occurs.
Aggressive corporate or individual investors who purchase Corporate Raiders :
a company’s shares with the intention of achieving a
controlling interest and replacing the existing management.

Minimum rate of return needed to compensate suppliers of Cost of Capital :

capital for committing resources to an investment.
Fixed interest payments made on bonds and debentures. Coupons :
Provision in a loan agreement to protect lenders’ interests Covenant :
by requiring certain actions to be taken and others refrained
from.
Type of load that involves regular repayments which Credit Foncier Loan :
include principal and interest.
Possibility of loss because a party fails to meet its Credit Risk :
obligations.
Exchange rate between two currencies derived from the Cross Rates :
exchange rates between the currencies and a third currency.
Period during which the purchaser of a share is qualified to Cum Dividend Period :
receive a previously announced dividend. The cum
dividend period ends on the ex-dividend date.
When shares are traded cum rights the buyer is entitled to Cum Rights :
participate in the forthcoming rights issue.
Simultaneous borrowing and lending operation in which Currency Swap :
two parties initially exchange specific amounts of two
currencies at the spot rate. Interest payments in the two
currencies are also exchanged and the parties agree to
reverse the initial exchange after a fixed term at a fixed
exchange rate.
Cash, inventory, accounts receivable and other assets that Current Assets :

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will normally be converted into cash within a year.
Debt or other obligations due for payment within a year. Current Liabilities :
The party upon whom an order, draft, check or bill of Drawee :
exchange is drawn.
Involves calculating the annual cash flow of an annuity that Equivalent Annual Value
has the same life as the project and whose present value Method :
equals the net present value of the project.
Medium to long-term international bearer security sold in Eurobond :
countries other than the country of the currency in which
the bond is denominated.
Short-term note sold in countries other than the country of Euronote :
the currency in which it is denominated.
Research method that analysis the behavior of a security's Event Study :
price around the time of a significant even such as the
public announcement of the company's profit.
Variability of an entity's value that is due to changes in Exchange Risk :
exchange rates.
The date on which a share begins trading ex-dividend. A Ex-Dividend Date :
share purchases ex-dividend does not include a right to the
forthcoming dividend payment.
Fixed Price at which an underlying asset can be traded, Exercise Price :
pursuant to the terms of an option contract; also known as
strike price.
Of the term structure is that interest rates are set such that Expetations Theory :
investors in bonds or other debt securities can expect, on
average, to achieve the same return over any future period,
regardless of the security in which they invest.
Date on which a share begins trading ex-rights. After this Ex-rights Date :
date a share does not have attached to it the right to
purchase any additional share(s) on the subscription date.
Sum promised to be paid in the future on a debt security, Face Value :
such as a promissory note or a bill of exchange.

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Financier who provides funds on the security of the Factor :
borrower's accounts receivable.
Sale of a company's accounts receivable at a discount to a Factoring :
financial institution.
Factoring (or invoice discounting) agreement under which Factoring with Recourse :
the factor is reimbursed by the selling company if the
debtor defaults.
Long-term non-cancellable lease that effectively transfers Finance Lease :
the risks and benefits of ownership of an asset from the
lessor to the lessee.
Arrangement, agreement or investment that produces cash Financial Contract :
flows.
Situation where a company's financial obligations cannot Financial Distress :
be met, or can be met only with difficulty.
Institution that acts as a principal in accepting funds from Financial Intermediary :
depositors and lending them to borrowers.
Debt security whose interest rate is adjusted periodically in Floating-Rate Note :
line with changes in a specified reference rate.
Loan, usually made by a wholesaler to a retailer, that Floor-Plan Finance :
finances an inventory of durable goods such as motor
vehicle. Also known as wholesale finance.
Bond issued outside the borrower's country and Foreign Bond :
denominated in the currency of the country in which it is
issued.
Difference between spot and forward rates. Forward Margin :
Exchange rate that is established now but with payment and Forward Rate :
delivery to occur at a specified future date.
Dividend that carries a credit for income tax paid by the Franked Dividend :
company.
That part of the return on shares or a share market index Franking Premium :
which is due to tax credits associated with franked
Dividends.

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Factoring agreement under which the factor manages the Full Service Factoring :
company's debtors.
Amount to which a present sum, such as a principal, will Future Sum :
grow (accumulate) at a future date, through operation of
interest.
The value at a future date of principal invested now at Future Value :
either a simple or compound rate.
Bill facility in which the borrower must issue bills so that Fully Drawn Bill Facility :
the full agreed amount is borrowed for the period of the
facility.
Individuals and companies who enter into contracts in order Hedgers :
to reduce risk.
Takeover of a target company operating in the same line of Horizontal Takeover :
business as the acquiring company.
Strategy designed to achieve a target sum of money at a Immunization :
future point in time, regardless of interest rate changes.
One that may be accepted or rejected without affecting the Independent Project :
acceptability of another project.
Interest rate set and published by a lender from time to time Indicator Rate :
and used as a base on which interest rates on individual
loans are determined, usually by adding a margin.
Curve showing a set of combinations such that an Indifference Curve :
individual derives equal utility from (and thus is indifferent
between) any combinations in the set.
Situation where all relevant information is not known by all Information Asymmetry :
interested parties. Typically, this involves company
'insiders' (managers) having more information about the
company's prospects than 'outsider' (shareholders and
lenders).
Situation in which price accurately reflect available Information Efficiency :
information; different categories of information give rise to
different categories of information efficiency.

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A company's first offering of shares to the public. Initial Public Offering (IPO) :
The average interest rate on overnight loans (data collected Interbank Overnight Loan
during each day). Rate :
Loan in which the borrower is required to make regular Interest-Only Loan :
payments to cover interest accrued but is not required to
make payments to reduce the principal. On the maturity
date of the loan, the principal is repaid in a lump sum.
A hybrid form of organization in which all partners enjoy Limited Liability Partnership
limited liability for the business's debts. It combines the (Ltd. Liability Co.) :
limited liability advantage of a corporation with the tax
advantages of a partnership.
An informal arrangement in which a bank agrees to lend up Line of Credit :
to a specified maximum amount of funds during a
designated period.
Liquidation occurs when the assets of a division are sold Liquidation :
off piecemeal, rather than as an operating entity.
Ratios that show the relationship of a firm's cash and other Liquidity Ratios :
current assets to its current liabilities.
A procedure used to speed up collections and reduce float Lockbox Plan :
through the use of post office boxes in payers' local areas.
In a lease contract, the party that owns the asset. Lessor :
Commonly used reference rate, derived daily from the London Interbank Offered
interest rates at which major international banks in London Rate :
will lend to each other.
The cost of obtaining another dollar of new capital; the Marginal Cost of Capital
weighted average cost of the last dollar of new capital (MCC) :
raised.
A firm that operates in an integrated fashion in a number of Multinational Corporation
countries. (Global Corporation) :
Then financial markets in which funds are borrowed or Money Markets :
loaned for short periods (less than one year).
The situation where a project has two or more IRRs. Multiple IRRs :

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A set of projects where only one can be accepted. Mutually Exclusive Projects :
Operating lease where the lessor is responsible for all Maintenance Lease :
maintenance and service of the leased asset.
Purchase of all of a company's issued shares by a group led Management Buyout :
by the company's management.
The difference between the present value of the net cash Net Present Value (NPV) :
flows from an investment discounted at the required rate of
return, and the initials cash outlay on the investment.
A method of ranking investment proposals using the NPV, Net Present Value (NPV)
which is equal to the present value of future net cash flows, Method :
discounted at the marginal cost of capital.
Current assets minus current liabilities. Net Working Capital (NWC) :
Growth which is expected to continue into the foreseeable Normal Growth (Constant
future at about the same rate as that of the economy as a Growth) :
whole; g is a constant.
Quoted interest rate where interest is charged more Nominal Interest Rate (1) :
frequently than the basis on which the interest rate is
quoted. The interest rate actually used to calculate the
interest charge is taken as a proportion of the quoted
nominal rate.
Quoted interest rate where interest is charged more Nominal Interest Rate (1) :
frequently than the basis on which the interest rate is
quoted. The interest rate actually used to calculate the
interest charge is taken as a proportion of the quoted
nominal rate.
Facility provided by one or more institutions that agree to Note Issuance Facility :
underwrite issues of short-term notes by a borrower.
Rate of return on debt. Interest Rate :
Theory which states that a forward exchange rate is given Interest Rate Parity :
by relative interest rates in the two currencies.
Agreement between two parties to exchange interest Interest Rate Swap :
payments for a specified period, related to an agreed

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principal amount. The most common type of interest swap
involves an exchange of fixed interest payments for
floating interest payments.
Value of an option if exercised immediately. Intrinsic Value :
Accepts funds from the public and invests them in assets; Investing Institution :
includes superannuation funds, life insurance companies
and unit trusts.
Opportunities to expand which are expected to be profitable Investment Opportunities :
but require further cash outlays to develop or maintain their
value.
Factoring agreement in which the debtors of the company Invoice Discounting :
seeking finance are unaware of the existence of the
factoring agreement.
Costs of raising new capital by issuing securities, including Issue Costs :
underwriting fees and legal, accounting and printing
expenses incurred in preparing a prospectus or other offer
documents. Also known as flotation Costs.
Observation that, on average, share prices increase in January Effect :
January more than in other months.
Problem that any test of market efficiency is Joint Test Problem :
simultaneously a test of some model of 'normal' asset
pricing.
Legal concept which protects shareholders whose liability Limited Liability :
to meet a company's debts is limited to any amount unpaid
on the shares they hold.
Involves decisions about the composition and level of Liquidity Management :
company's liquid assets.
Of the term structure is that although future interest rates Liquidity Premium (Risk
are determined by investors' expectations, investors require Premium) Theory :
some reward (liquidity premium) to assume the increased
risk of investing long term.
Natural logarithm of the ratio of successive security prices. Log Price Relative :

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Implicitly, it is assumed that pric3es have grown (or
decayed) in a continuous fashion between the two dates on
which the prices are observed. Also known as a logarithmic
rate of return and a continuous rate of return.
Demand for extra funds to be deposited into trader's Margin Call :
account.
Time series regression of an asset's returns on returns on Market Model :
the market index; it represents the empirical analogue of
the capital asset pricing model.
A lease under which the lessor maintains and finances the Operating Lease :
property; also called a service lease.
The practice of purchasing components rather than making Out-Sourcing :
them in-house.
A large collection of brokers and dealers, connected Over-the-Counter Market :
electronically by telephones and computers, that provides
for trading in unlisted securities.
Right to begin an investment project at a later date. Option to defer :
Rate of return between two dates, measured by the change Geometric Rate of Return :
in value divided by the earlier value; the average of a
sequence of geometric rates of return is found by a process
that resembles compounding.
Ratio of the change in an option price that results from a Hadge Ratio :
change in the price of the underlying asset; also known as
an option's delta.
A Hybrid form of organization consisting of general Limited Partnership :
partners who have unlimited liability for the partnership's
debts, and limited partners, whose liability is limited to the
amount of their investment.
An asset that can be converted to cash quickly without Liquid Asset :
having to reduce the asset's price very much.
Principle maintaining that an asset's price in a given Law of One Price :
currency will be the same regardless of the currency in

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which the price is quoted.
In a lease contract, the party using the asset. Lessee :
Takeover of a company which is largely financed using Leveraged Buyout :
borrowed funds; the remaining equity is privately held by a
small group of investors.
Finance lease where the lessor borrows most of the funds to Leveraged Lease :
acquire the asset.
Hedger who hedges by means of buying future contracts Long Hedger :
today.
The actual net cash, as opposed to accounting net income Net Cash Flow :
that a firm generates during some specified period.
Tax deductions for items such as investment tax credits and Non-Debt Tax Shields :
tax losses carried forward.
The return on the best alternative use of an asset, or the Opportunity Cost :
highest return that will not be earned if funds are invested
in a particular project.
Formal organizations having tangible physical locations Organized Security Exchanges
that conduct auction markets in designated("listed") :
securities. The two major U.S. stock exchanges are the
New York Stock Exchange (NYSE) and the American
Stock Exchange (AMEX).
A cash deposit, cost, or amount paid. Has a minus sign. Outflow :
Right to discontinue an investment project. Option to Abandon :
A provision in the corporate charter or bylaws that gives Preemptive Right :
common stockholders the right to purchase on a pro rata
basis new issues of common stock (or convertible
securities).
A Market in which corporations raise capital by issuing Primary Market :
new securities.
A corporation that is owned by a relatively large number of Publicly Owned Corporation :
individuals who are not actively involved in its
management.

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Takeover in which a bidder seeks to acquire no more than Partial Takeover :
part of a company's issued shares.
Set of future cash flows. Payoff Structure :
Observation that even after adjusting for beta risk, there is a P/E Effect :
relationship between share returns and P/E ratios.
Strategic move by a company that may become a take over Poison Pill :
target to make its shares less attractive to an acquirer by
increasing the cost of a take over (e.g. an issue of securities
which will convert to shares if a takeover bid occurs).
Combined holding of more than assets. Portfolio :
The value today that is equivalent to the stream of cash Present Value of a Contract :
flows promised in a financial contract.
Amount borrowed at the outset of a debt contract. Principal (or Principal Sum) :
Short-term marketable debt security in which the borrower Promissory Note :
promises to pay a stated sum on a stated future date. Also
known as one-name paper and commercial paper.
Partial takeover bid to acquire a specified proportion of the Proportional Bid :
shares held by each shareholder.
Right to sell an underlying asset at a fixed price. Put Option :
This ratio is calculated by deducting inventories from Quick Ratio (Acid Test
current assets and dividing the remainder by current Ratio) :
liabilities. This ratio is the indicator of a company's
financial strength (or weakness).
Calculation that expresses the ratio of net cash inflows to Rate of Return :
cash outflows produced by a financial contract.
Interest rate after taking out the effects of inflation. Real Interest Rate :
Selling a short-term debt security in the secondary market. Rediscounting :
Claim to profit or assets that remain after the entitlements Residual Claim :
of all other interested parties have been met.
Situation in which investors are indifferent to risk; assets Risk Neutrality :
are therefore priced such that they are expected to yield the
risk-free interest rate.

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The practice of deliberately paying late. Stretching Accounts Payable :
Additional inventory held when demand is uncertain, to Safety Stock :
reduce the probability of a stock out.
Purchase or sale of an existing security. Secondary Market
Transaction :
All publicly available information is reflected in the Semi-Strong-Form Efficiency :
security’s current market price.
Observation that returns on the shares of small Size Effect :
capitalization companies appear to be too high compared to
returns on other shares.
Individuals and companies who enter into contracts in order Speculators :
to profit from correctly anticipating price movements.
Price of the commodity when the buyer pays immediately Spot Price :
and the seller delivers immediately.
Rate for transactions for immediate delivery. In the case of Spot Rate :
foreign exchange, the spot rate is for settlement in 2 days.
Long (bought) position in one maturity date, paired with a Spread :
short (sold) position in another maturity date
Square root of the variance. Standard Deviation :
All information, whether public or private, is reflected in Strong-Form Efficiency :
the security’s current market price.
In takeovers, the situation where the performance and Synergy :
therefore the value of a combined entity exceeds those of
the previously separate components.
That component of total risk which is due to economy-wide Systematic/Market-Related/
factors. Non-Diversifiable Risk :
The percentages of debt, preferred stock, and common Target (Optimal) Capital
equity that will maximize the firm's stock price. Structure :
The mix of debt, preferred stock, and common equity with Target Capital Structure :
which the firm plans to raise capital.
Debt arising from credit sales and recorded as an account Trade Credit :
receivable by the seller and as an account payable by the

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buyer.
Acquisition of control of one company by another. Takeover :
Principle that a dollar is worth more (less), the sooner Time Value of Money :
(later) it is to be received, all other things being equal.
US term for a company’s own shares that have been Treasury Stock :
repurchased and held rather than cancelled.
Observation that, on average, share prices increase around Turn-of-the-Month Effect :
the time of a new month beginning, more than at other
times.
Funds lent where the loan may be terminated or 24-Hour Loans :
renegotiated after 7 days, on 24 hours’ notice.
A series of cash flows in which the amount varies from one Uneven Cash Flow Stream :
period to the next.
Theory which states that the forward rate is an unbiased Unbiased Forward Rates :
predictor of the future spot rate.
In this context the tax deducted by a company from the Withholding Tax :
dividend payable to a non-resident shareholder.
A bond that pays no annual interest but is sold at a discount Zero Coupon Bond :
below par, thus providing compensation to investors in the
form of capital appreciation.
A common stock whose future dividends are not expected Zero Growth Stock :
to grow at all; that is g=0.
A set of ratios that relate the firm's stock price to its Market Value Ratios :
earnings and book value per share.
Securities that can be sold on short notice. Marketable Securities :
A specified date on which the par value of a bond must be Maturity Date :
repaid.
The combination of two firms to form a single firm. Merger :
Line that shows the combinations of current and future Market Opportunity Line :
consumption that an individual can achieve from a given
wealth level, using capital market transactions.
Portfolio of all risky assets, weighted according to their Market Portfolio :

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market capitalization.
Process of adjusting traders' account balances to reflect Marking-to-Market :
changes in market prices.
Bearer securities with an initial term to maturity of more Medium-Term Notes :
than one year and issued continually.
The difference between our checkbook balance and the Net Float :
balance shown on the bank's books.
Interest rate before taking out the effects of inflation. Nominal Interest Rate (2) :
Any bill of exchange that has been neither accepted nor Non-Bank Bill :
endorsed by a bank.
Type of loan used in leveraged leases where the lender has Non-Recourse Loan :
no recourse to the lesser in the event of default by the
lessee.
The maximization of the firm's net income Profit Maximization :
A group of ratios which show the combined effects of Profitability Ratios :
liquidity, asset management, and debts on operating results.
Frictionless market in which there are no taxes, no Perfect Capital Market :
transaction costs, all relevant information is costless
available to all participants and all participants are price
takers.
Observation that share returns display a trend after an Post-Event Drift :
event.
Loan repaid by a sequence of equal cash flows, each of Principal-and-Interest Loan :
which is sufficient to cover the interest accrued since the
previous payment and to reduce the current balance owing.
Therefore, the debt is extinguished when the sequence of
cash flows is completed. Also known as a credit foncier
loan.
Curve that displays the investment opportunities and Production Possibilities
outcomes available to the company; its shape therefore Curve :
determines the combinations of current dividend,
investment and future dividend that a company can

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achieve.
An officer charged with receiving and disbursing funds. Treasurer :
Treasurer normally plays role of a financial manager.
A model in which the dividend paid is set equal to the Residual Dividend Model :
actual earnings minus the amount of retained earnings
necessary to finance the firm's optimal capital budget.
One who dislikes risk. Risk-Averse Investor :
A loan backed by collateral, often inventories or Secured Loan :
receivables.
A statement reporting how much of the firm's earnings Statement of Retained
were retained in the business rather than paid out in Earnings :
dividends. The figure for retained earnings that appears
here is the sum of the annual retained earnings for each
year of the firm's history.
Agreement in which a company sells an asset and then Sale and Lease-Back
leases it back. Agreement :
Analysis of the effect of changing one or more input Sensitivity Analysis :
variables to observe the effects on the results.
Hedger who hedges by means of selling futures on tracts Short Hedger :
today.
Process of first entering into a contract to sell and later Short Selling :
entering into a contract to buy.
Method of calculating interest in which, during the entire Simple Interest :
term of the loan, interest is computed on the original sum
borrowed.
Relationship between interest rates and term to maturity for Term Structure of Interest
debt securities in the same risk class. Rates :
Research method designed to detect systematic patterns in Tests for Return Predictability
asset prices. :
Biased response of a price to information in which the Under reaction :
initial price movement can be expected to continue.
A weighted average of the component costs of debt, Weighted Average Cost of

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preferred stock, and common equity. Capital (WACC) :
A firm's investment in short-term assets--cash, marketable Working Capital :
securities, inventory, and accounts receivable.
Basic policy decision regarding (1) target levels for each Working Capital Policy :
category of current assets and (2) how current assets will be
financed.
Information contained in the past series of prices of a Weak-form Efficiency :
security is reflected in the security’s current market price.
The extent to which fixed costs are used in a firm's Operating Leverage :
operations.
That cash flow which arises from normal operations; the Operation Cash Flow :
difference between sales revenues and cash operation
expenses, after taxes on operation income.
The dividend policy that strikes a balance between current Optimal Dividend Policy :
dividends and future growth and maximizes the firm's stock
price.
The percentages of debt, preferred stock, and common Optimal Capital Structure :
equity that will maximize the firm's stock price.
An arrangement under which goods or services are sold to a Open Account :
customer on credit, but with no formal debt contract.
Payment is due after an account is sent to the customer.
The right but not the obligation to buy or sell underlying Option :
assets at a fixed price for a specified period.
Theory which states that the exchange rate between two Purchasing Power Parity :
currencies adjusts to reflect the relative inflation rates in the
two currencies.
Option that gives the buyer the right to enter into the Put Option on a Futures
futures contract as a seller at a predetermined price. Contract :
That the time sequence of returns on shares conforms to the Random Walk Hypothesis :
statistical concept of a ‘random walk’; this includes the
implication that the time sequence is random.
Disposal value of a project’s assets less any dismantling Residual Value :

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and removal costs associated with the project’s termination.
Bill facility in which the borrower can issue bills as Revolving Credit Bill Facility :
required, up to the agreed limit.
Loan for general business purposes secured against the Revolving Credit Facility :
inventory of the borrower.
Debt which ranks below other debt in the event that a Subordinated Debt :
company is wound up.
The price that must be paid to obtain a new share. Subscription Price :
Loan arranged by one or more lead banks, funded by a Syndicated Loan :
syndicate that usually includes other banks.
Factoring agreement whose existence is not disclosed to the Undisclosed (or Confidential)
company’s debtors. Factoring :
Debt which has not been subordinated. Unsubordinated Debt :
That component of total risk which is unique to the firm Unsystematic/Diversifiable
and may be eliminated by diversification. Also know as Risk :
Company specific or Asset specific Risk.
Worst loss possible under normal market conditions for a Value at Risk :
given time horizon.
Loan where the lender can change the interest rate charged, Variable Interest Rate Loan :
usually in line with movements in the general level of
interest rates in the economy.
Measure of variability; the mean of the squared deviations Variance :
from the mean or expected value.
Takeover of a target company which is either a supplier of Vertical Takeover :
goods to, or a consumer of goods produced by, the
acquiring company.
A long-term option to buy a stated number of shares of Warrant :
common stock at specified price.
Problem that arises in bidding because the bidder who Winner's Curse :
‘wins’ is likely to be the one who most overestimates the
value of the assets offered for sale.
The rate of return earned on a bond if it is held to maturity. Yield to Maturity (YTM) :

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Graph of yield to maturity against bond term at a given Yield Curve :
point in time.
Refers to the ease and quickness with which assets can be Liquidity :
converted to cash.
Total assets minus total liabilities of an individual or Shareholder's Equity :
company. For a company, also called owner's equity or net
worth or net assets.
The ratio of the price per share to earnings per share; shows Price/Earning (P/E) Ratio :
the dollar amount investors will pay for $1 of current
earnings.

This ratio measures income per dollar of sales; it is Profit Margin on Sales :
calculated by dividing net income by sales.
This ratio measures income per dollar of sales; it is Profit Margin on Sales :
calculated by dividing net income by sales.
An issue of securities direct to chosen investors rather than Private Issue :
the general public.
Financial managers plan, organize, direct, control and Financial Managers :
evaluate the operation of financial and accounting
departments. They develop and implement the financial
policies and systems of establishments. Financial managers
establish performance standards and prepare various
financial reports for senior management. They are
employed in financial and accounting departments in
companies throughout the private sector and in
government.
Someone who maintains and audits business accounts. Controller :
Controller normally plays role of an accountant.
One who neither likes nor dislikes risk. Risk-Neutral Investor :
A transaction in which a firm buys back shares of its own Stock Repurchase :
stock, thereby decreasing share outstanding, increasing

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EPS, and, often, increasing the stock price.
An action taken by a firm to increase the number of share Stock Split :
outstanding, such as doubling the number of share
outstanding by giving each stockholder two new share for
each one formerly held.
The primary goal for management decision; considers the Stockholder Wealth
risk and timing associated with expected earnings per share Maximization :
in order to maximize the price of the firm's common stock.
A long-run plan which outlines in broad terms the firm's Strategic Business Plan :
basic strategy for the next 5 to 10 years.
Graphical representation of the capital asset pricing model. Security Market Line :
Venture capitalist’s first contribution towards the financing Seed Capital :
requirements of a start-up business.
A ratio that measures the firm's ability to meet its annual Times-Interest-Earned (TIE)
interest obligations calculated by dividing earnings before Ratio :
interest and taxes by interest charges: TIE = EBIT / I.
The ratio calculated by dividing sales by total assets. Total Assets Turnover Ratio :
Theory which proposes that companies have an optimal Trade-Off Theory :
capital structure based on a trade-off between the benefits
and costs of using debt.
Theory which states that the difference in interest rates Uncovered Interest Parity :
between two countries is an unbiased predictor of the future
change in the spot exchange rate. Also known as
International Fisher Effect.
The face value of a stock or bond. Par Value :
A holding company; a firm which controls another firm by Parent Company :
owning a large block of its stock.
An unincorporated business owned by two or more Partnership :
persons.
The length of time required for an investment's net Payback Period :
revenues to cover its cost.
This term designates equal cash flows coming at regular Payment (PMT) :

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intervals.
The date on which a firm actually mails dividend cheques. Payment Date :

Current assets that a firm must carry even at the trough of Permanent Current Assets :
its cycles.
A stream of equal payments expected to continue forever. Perpetuity :
A cash balance held in reserve for random, unforeseen Precautionary Balance :
fluctuations in cash inflow and outflows.
The value today of a future cash flow or series of cash Present Value (PV) :
flows.
A published interest rate charged by commercial banks to Prime Rate :
large, strong borrowers.
Theory which proposes that companies follow a hierarchy Pecking Order Theory :
of financing sources in which internal funds are preferred
and, if external funds are needed, borrowing is preferred to
issuing riskier securities
A document that, among other things, provides details of Prospectus :
the company and the terms of the issue of securities which
must be provided to potential investors by a company
seeking to issue shares or other securities.
The CFO is responsible for the corporation's accounting Chief Financial Officer
and financial structure and activities. The CFO usually (CFO) :
reports to the CEO.
Gross Working Capital includes total Current Assets. Gross Working Capital :
A sole proprietorship is a business owned and operated by Sole Proprietorship :
one individual.
Company that operates almost entirely in only one industry Pure Play :
or line of business.
Relationship that exists between the price of a call option Put-Call Parity :

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and the price of the corresponding put option.
The specific cash flows that should be considered in a Relevant Cash Flows :
capital budgeting decision.
The minimum rate of return on a common stock that a Required Rate of Return (ks) :
stockholder considers acceptable.
That portion of the firm's earnings that has been saved Retained Earnings :
rather than paid out as dividends.
The ratio of net income to common equity; measures the Return on Common Equity
rate of return on common stockholders' investment. (ROE) :
The ratio of net income to total assets. Return on Total Assets
(ROA) :
A formal, committed line of credit extended by a bank or Revolving Credit Agreement :
other lending institution.
In a financial market context, the chance that an investment Risk :
will not provide the expected return.
One who prefers risk. Risk-Seeking Investor :
A forecast of a firm's unit and dollar sales for some future Sales Forecast :
period; it is generally based on recent sales trends plus
forecasts of the economic prospects for the nation, region,
industry, and so forth.
A Market in which securities and financial assets are traded Secondary Market :
among investors after they have been issued by
corporations. In other words, market where previously
issued securities are traded.
A statement reporting the impact of a firm's operating, Statement of Cash Flows :
investing, and financing activities on cash flows over an
accounting period.
A dividend paid in the form of additional shares of stock Stock Dividend :
rather than in cash.
Cost that has already been incurred and is irrelevant to Sunk Cost :
future decision making.
Current assets that fluctuate with seasonal or cyclical Temporary Current Assets :

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variations in sales.
An analysis of a firm's financial ratios over time; used to Trend Analysis :
estimate the likelihood of improvement or deterioration in
its financial situation.
Object of a takeover bid. Target Company :
Investment strategy in which the tax rules make it attractive Tax Loss Selling :
for an investor to sell certain shares just before the end of
the tax year.
The value, as at the date of the final cash flow promised in Terminal Value of a Contract :
a financial contract, that is equivalent to the stream of
promised cash flows.
Research method that tests whether systematic profits can Tests for Private Information :
be generated by making investment decisions on the basis
of private information.
The expected price of one share when shares begin to be Theoretical Ex-rights Share
traded ex-rights theoretical rights price the expected price Price :
of one right calculated on the basis of the cum-rights share
price.
Value of an option in excess of its intrinsic value. Time Value of an Option :
A company is, in general, any group of persons united to Company :
pursue a common interest. The term is thus synonymous
with association, but more often it is used specifically to
identify associations formed for profit, such as the
partnership, the joint-stock company, and the for-profit
corporation. A company is not necessarily a corporation,
and thus may not have a separate existence from its
members.
Returns greater or less than that which the market expects Abnormal Returns :
for a security.
In a Bill of Exchange, the party agreeing to pay the holder Acceptor :
the bill’s face value on the maturity date; usually a bank or
other financial institution. Also known as the drawer.

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Sum of money owed by a purchaser as a result of having Accounts Payable :
bought goods or services on credit. Also known as
creditors.
Where a company borrows funds and pledges its accounts Accounts Receivable Financing
receivable as security for the loan. :
This is the process by which, through the operation of Accumulation :
interest, a present sum becomes a greater sum in the future.
Series of cash flows of equal amount equally spaced in Annuity :
time.
Annuity, in which the first cash flow is to occur Annuity Due :
‘immediately’ (i. e. on the valuation date)
Buying an asset and simultaneously selling it for a higher Arbitrage :
price, usually in another market, so as to make a risk-free
profit.
Model of asset pricing that describes the risk premium for a Arbitrage Pricing Model :
risky asset as a linear combination of various risk factors.
Money repayable immediately, at the option of the lender. At Call :
Expresses the profit generated by an investment or project Accounting Rate of Return
as a percentage of the capital invested. (ARR) :
A model in which the cost of capital for any security or Capital Asset Pricing Model
portfolio of securities equals the riskless rate plus a risk (CAPM) :
premium that is proportionate to the amount of systematic
risk of the security or portfolio.
Accounts that have proven to be uncollectible and are Bad Debts :
written off.
Bill of exchange that has been accepted or endorsed by a Bank Bill :
bank.
Direct or indirect costs associated with financial difficulty Bankruptcy costs :
that leads to control of a company being transferred to
lenders.
Spot price at a point in time minus the futures price (for Basis :
delivery at some later date) at that point in time.

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Security whose ownership is not registered by the issuer Bearer Security :
and possession of the physical document is primary
evidence of ownership.
Index calculated by dividing the present value of the future Benefit-Cost Ratio :
net cash flows by the initial outlay (also known as a
profitability index).
Measure of a security’s systematic risk, describing the Beta :
amount of risk contributed by the security to the market
portfolio.
Agreement in which one entity (normally a bank) Bill Acceptance Facility :
undertakes to accept bills of exchange drawn by another
entity (the borrower).
Agreement in which one entity (normally a bank) Bill Discount Facility :
undertakes to discount (buy) bills of exchange drawn by
another entity (the borrower).
Observation that, even after adjusting for beta risk, there is Book-to-Market Effect :
a relationship between share returns and book-to-market
ratios.
A balance due from a customer. Account Receivable :
A firm's net income as reported on its income statement. Accounting Profit :
Continually recurring short-term liabilities, especially Accruals :
accrued wages and accrued taxes.
A potential conflict of interest between the agent (manager) Agency Problem :
and (1) the outside stockholders or (2) the creditors (debt
holders ).
A report showing how long accounts receivable have been Aging Schedule :
outstanding.
A report issued annually by a corporation to its Annual Report :
stockholders. It contains basic financial statements, as well
as management's opinion of the past year's operations and
the firm's future prospects.
A set of ratios which measure how effectively a firm is Asset Management Ratios :

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managing its assets. Also called Asset Utilization Ratios.
A statement of the firm's financial position at a specific Balance Sheet :
point in time.
A long-term debt instrument. Bond :
The volume of sales at which total costs equal total Breakeven Point :
revenues, causing operating profits (or EBIT) equal to zero.
The risk associated with projections of a firm's future Business Risk :
returns on assets.
An option to buy, or "call," a share of stock at a certain Call Option :
price within a specified period.
A provision in a bond contract that gives the issuer the right Call Provision :
to redeem the bonds under specified terms prior to the
normal maturity date.
The process of planning expenditures on assets whose cash Capital Budgeting :
flows are expected to extend beyond one year. In other
words, the process of planning and managing a firm's long-
term investments.
The financial markets for stocks and for long-term debt Capital Markets :
(one year or longer).
A table showing cash flows (receipts, disbursements, and Cash Budget :
cash balances) for a firm over a specified period.
A reduction in the price of goods given to encourage early Cash Discount :
payment.
The process of converting a check that has been written and Check Clearing :
mailed into cash in the payee's account.
The tendency of a firm to attract a set of investors who like Clientele Effect :
its dividend policy.
A corporation that is owned by a few individuals who are Closely Held Corporation :
typically associated with the firm's management.
The procedures that a firm follows to collect accounts Collection Policy :
receivable.
The amount of checks that we have received but which Collections Float :

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have not yet been credited to our account.
Unsecured, short-term promissory notes of large firms, Commercial Paper :
usually issued in denominations of $100,000 or more and
having an interest rate somewhat below the prime rate.
Also known as Net Worth. The capital supplied by Common Stockholders' Equity
common stockholder-capital stock, paid-in capital, retained :
earnings and, occasionally, certain reserves. Total equity is
common equity plus preferred stock.
A bank balance that a firm must maintain to compensate Compensating Balance :
the bank for services rendered or for granting a loan.
A bond that is exchangeable, at the option of the holder, for Convertible Bond :
common stock of the issuing firm.
A currency that may be readily exchanged for other Convertible Currency :
currencies.
A security, usually a bond or preferred stock, that is Convertible Security :
exchangeable at the option of the holder for the common
stock of the issuing firm.
Bonds issued by corporations. Corporate Bonds :
A legal entity created by a state, separate and distinct from Corporation :
its owners and managers, having unlimited life, easy
transferability of ownership, and limited liability.
The length of time for which credit is granted. Credit Period :
A set of decisions that include a firm's credit period, credit Credit Policy :
standards, collection procedures, and discounts offered.
A statement of the credit period and any discounts offered-- Credit Terms :
for example, 2/10, net 30.
This ratio is calculated by dividing current assets by current Current Ratio :
liabilities. It indicates the extent to which current liabilities
are covered by those assets expected to be converted to
cash in the near future.
The ratio calculated by dividing accounts receivable by Days Sales Outstanding
average sales per day; indicates the average length of time (DSO) :

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the firm must wait after making a sale before receiving
cash. OR The average length of time required to collect
credit sales.
A long-term bond that is not secured by a mortgage on Debenture :
specific property.
The date on which a firm's directors issue a statement Declaration Date :
declaring a dividend.
The charge for assets used in production Depreciation is Depreciation :
not a cash outlay.
The decision as to how much of current earnings to pay out Dividend Policy Decision :
as dividends rather than to retain for reinvestment in the
firm.
A chart designed to show the relationships among return on Du Pont Chart :
investment, asset turnover, the profit margin, and leverage.
an amount paid to shareholders from a company’s after-tax Dividend :
earnings.
Net income divided by the number of share of common Earnings Per Share (EPS) :
Stock outstanding.
Value added to shareholders by management during a given Economic Value Added :
year.
An inventory model that determines how much to order by Economic Order Quantity
determining the amount that will meet customer service (EOQ) :
levels while minimizing total ordering and holding costs.
The annual rate of interest actually being earned, as Effective Annual Rate (EAR) :
opposed to the quoted rate. Also called the "equivalent
annual rate."
The number of units of a given currency that can be Exchange Rate :
purchased for one unit of another currency.
The rate of return on a common stock that a stockholder Expected Rate of Return :
expects to receive.
The extent to which fixed-income securities (debt and Financial Leverage :
preferred stock) are used in a firm's capital structure.

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An increase in stockholders' risk, over and above the firm's Financial Risk :
basic business risk, resulting from the use of financial
leverage.
A firm which offers a wide range of financial services, Financial Service
including investment banking, brokerage operations, Corporation :
insurance, and commercial banking.
The ratio of sales to net fixed assets Fixed Assets Turnover Ratio :
This ratio extends the TIE ratio to include the firm's annual Fixed Charge Coverage Ratio :
long-term lease and sinking fund obligations.
The world monetary system in existence after World War II Fixed Exchange Rate System :
until 1971, under which the value of the U.S. dollar was
tied to gold, and the values of the other currencies were
pegged to the U.S. dollar.
A system under which exchange rates are not fixed by Floating Exchange Rates :
government policy but are allowed to float up or down in
accordance with supply and demand.
The percentage cost of issuing new common stock. Also Flotation Cost :
known as Issue Cost.
Credit received during the discount period. Free Trade Credit :
The number of shares outstanding and available for trading Float :
by the public.
The act of selling stock to the public at large by a closely Going Public :
held corporation or its principal stockholders.
The expected rate of growth (g) in dividends per share. Growth Rate :
Using transactions to lower risk. Hedging :
A corporation that own sufficient common stock of another Holding Company :
firm to achieve working control over it.
The discount rate (cost of capital ) which the IRR must Hurdle Rate :
exceed if a project is to be accepted
The discount rate which forces the PV of a project's inflows Internal Rate of Return
to equal the PV of its costs. (IRR) :
A measure of the return on an investment over a given Average Accounting Return

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period, equal to (average projected earnings - taxes) / (AAR) :
average book value over the duration of the investment.
A statement summarizing the firm's revenues and expenses Income Statement :
over an accounting period, generally a quarter or a year.
The net cash flow attributable to an investment project. Incremental Cash Flow :
A formal agreement between the issuer of a bond and the Indenture :
bondholders.
A contract between a bond issuer and a bond purchaser that Bond Indenture :
specifies the terms of a bond.
The tendency of prices to increase over time. Inflation :
A cash receipt. Inflow :
The theory that investors regard dividend changes as Information Content
signals of management's earnings forecasts. . (Signaling) Hypothesis :
The market consisting of stocks of companies that are in Initial Public Offering (IPO)
the process of going public. Market :
The risk of capital losses to which investors are exposed Interest Rate Risk :
because of changing interest rates.
A fixed charge for borrowing money. Usually a percentage Interest :
of the amount borrowed.
A method of ranking investment proposal using the rate of Internal Rate of Return (IRR)
return on an investment, calculated by finding the discount Method :
rate that equates the present value of future cash inflow s to
the project's cost.
The ratio calculated by dividing sales by inventories. Inventory Turnover Ratio :
An organization that underwrites and distributes new Investment Banking House :
investment securities and helps businesses obtain financing.
Money that is invested with an expectation of profit. Investment :
A corporate alliance in which two or more independent Joint Venture :
companies combine their resources to achieve a specific,
limited objective.
A high-risk, high-yield bond. Junk Bond :
A system of inventory control in which a manufacturer Just-in-Time (JIT) System :

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coordinates production with suppliers so that raw materials
or components arrive just as they are needed in the
production process.
Finance lease, usually leveraged, where the lesser and Cross-Border Lease :
lessee are located in different countries.
Financial contract in which the receiver of the initial cash Debt :
(the borrower) promises a particular cash flow, usually
calculated using an interest rate, to the provider of funds
(the lender).
The chance that a borrower will fail to meet obligations to Default Risk :
pay interest and principle as promised.
Relationship between default risk and promised yield on Default Risk Structure of
debt, for a given term to maturity. Interest Rates :
Annuity in which the first cash flow is to occur after a time Deferred Annuity :
period that exceeds the time period between each
subsequent cash flow.
Accounts where payment has not been made by the due Delinquent Accounts :
date.
Prospectus, profile statement or offer information statement Disclosure Document :
that must be supplied to potential investors to provide
information about an offer of securities.
Those which involve the process of discounting a series of Discounted Cash Flow (DCF)
future net cash flows to their present value. Methods :
Initial purchaser of a short-term debt security such as a Discounter :
promissory note or a bill of exchange.
Period during which a discount for prompt payment is Discount Period :
available to the purchaser.
Expression of the price reduction a purchaser will receive if Discount Rate :
payment is made within the discount period.
Sale of a subsidiary, division or collection of related assets, Divestiture :
usually to another company.
Groups of investors who choose to invest in companies Dividend Clienteles :

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that have dividend policies which meet their particular
requirements.
Ratio of the decline in the share price on the ex-dividend Dividend Drop-Off Ratio :
day to the dividend per share.
Arrangements which offer shareholders the option of Dividend Election Schemes :
receiving their dividends in one or more of a number of
forms.
Percentage of profit paid out to shareholders as dividends. Dividend Payout Ratio :
An increase in the value of an asset such as stocks, bonds, Capital Gain :
mutual funds and real estate between the time the asset was
purchased and the time the asset was sold.
Arrangement made by a company which gives shareholders Dividend Reinvestment Plan :
an option of reinvesting all or part of their dividends in
additional shares in the company, usually at a small
discount from market price.
Observation that, even after adjusting for beta risk, there is Dividend-Yield Effect :
a relationship between share returns and dividend yields.
Arranges or facilitates the direct transfer of funds from Financial Agency Institution :
lenders to borrowers.
Cash generated by a business that cannot be invested Free Cash Flow :
profitably in its existing line of business.
Annuity in which the frequency of charging interest does General Annuity :
not match the frequency of payment; thus, repayments may
be made either more frequently or less frequently than
interest is charged.
A company's merchandise, raw materials, and finished and Inventory :
unfinished products which have not yet been sold.
Controlling stock levels within the physical distribution Inventory Management :
function to balance the need for product availability against
the need for minimizing stock holding and handling costs.
Marketable short-term debt security in which one party (the Bill of Exchange (BOE) :
drawer) directs another party (the acceptor) to pay a stated

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sum on a stated future date.
Book value of a company’s equity divided by market value Book-to-market Ratios :
of the company’s equity.
Short-term loan, usually in the form of a mortgage, to cover Bridging Finance :
a need normally arising from timing differences between
two or more transactions.
Period in which prices rise strongly, departing from their Bubble :
‘true value’, frequently followed by a sudden decrease in
prices.
Investment strategy in which shares are bought and then Buy-and-Hold Policy :
retained in the investor’s portfolio for a long period.
Transfer from public ownership to private ownership of a Buy out or Going-Private
company through purchase of its shares by a small group of Transaction :
investors which usually includes the existing management.
Option that gives the buyer the right to enter into the Call Options on a Futures
futures contract as a buyer at a predetermined price. Contract :
Mix of debt and equity finance used by a company. Capital Structure :
A condition where a firm has limited resources available Capital Rationing :
for investment.
Approach that incorporates risk by adjusting the cash flows Certainty-Equivalent :
rather than the discount rate.
Factoring agreement under which the factor and the Co-operation Factoring :
company share responsibility for managing the company’s
debtors.
Movement of funds between two currencies to profit from Covered Interest Arbitrage :
interest rate differences while using forward contracts to
eliminate exchange risk.
Model expressing the value of a share as the sum of the Dividend Growth Model :
present values of future dividends where the dividends are
assumed to grow at a constant rate.
The party who issues an order, draft, check or bill of Drawer :
exchange.

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Measure of the time period of an investment in a bond or Duration :
debenture that incorporates cash flows that are made prior
to maturity.
That the price of a security (such as a share) accurately Efficient Market Hypothesis :
reflects the information available.
Acceptance by the seller of a bill in the secondary market, Endorsement :
of responsibility to pay the face value if there is default by
the acceptor, drawer and earlier endorsers.
GAAP (Generally Accepted Accounting Principles) is the GAAP :
standard framework of guidelines for financial accounting.
It includes the standards, conventions, and rules
accountants follow in recording and summarizing
transactions, and in the preparation of financial statements.
The cash flowing into the business from all sources over a Cash Inflow :
period of time. It includes the sale of products, new loans
received, sale of capital assets, and other income etc.
The cash flowing out of the business from all sources over Cash Outflow :
a period of time. It includes the purchase of production
inputs, machinery, repayment of borrowed money, etc.
Solvency refers to the ability to meet maturing obligations Solvency :
as they come due. It is the ability of an entity to pay its
debts with available cash.

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