Chapter_1_-_Terms_and_Questions_Answers - Chapter One Terms...

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Chapter One – Terms and Questions List of Terms 1. Finance - Involves the management of money. 2. Corporate Finance - The management of money/capital within a corporation. The major monetary decisions facing a corporation concern working capital management, capital budgeting and the capital structure decision. 3. Capital Markets - Financial markets (such as the NYSE, NASDAQ, OTC, CBOT) where issuers and investors buy and sell long-term (<1 year) financial instruments. 4. Debt - A financial asset (obligation) that typically has “fixed” cash inflows (outflows). Examples include bonds, loans and revolving credit facilities. 5. Stocks - Financial asset that represents equity ownership in a company. It is characterized by having junior status to the claims of creditors and preferred stockholders in the event of liquidation. 6. Market Efficiency - The stock market is brutally efficient, current prices reflect all publicly available information and prices react completely, correctly and almost instantaneously to incorporate the receipt of new information. 7. Asset Allocation - The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. 8. Diversification - A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. 9. Risk - The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. It is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. The greater the amount of risk an investor is willing to take, the greater potential return they expect. 10. Markets - Where shares are issued and traded either through exchanges or over-the- counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with ownership in the company and the exposure to potential gains based on the company's future performance. 11. Financial Intermediaries - When a financial intermediary borrows fund from savers or investors by issuing a claim, and uses those funds to make loans or to purchase higher yielding securities. Financial institutions act as middlemen, linking lenders and borrowers through intermediation. 12. Investment Decision - Investing the funds of the company in working capital, tangible and intangible assets to buy or build projects and investment that will be worth more than they cost. 13.
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This note was uploaded on 09/22/2008 for the course B A 301 taught by Professor Gray,garyjosephwoolridge,joseph during the Spring '07 term at Pennsylvania State University, University Park.

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Chapter_1_-_Terms_and_Questions_Answers - Chapter One Terms...

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