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Unformatted text preview: Glossary
ABC system An inventory system in
which items are classified according to
their value for inventory control purposes. arbitrage The process whereby
equivalent assets are bought in one place
and simultaneously sold in another,
making a risk-free profit. absolute purchasing power parity
theory Theory that claims the current
exchange rate is determined by the relative
prices in two countries of a similar basket
of traded goods and services. average tax rate The amount of tax
owed, divided by the amount of taxable
income. actuaries People who use applied
mathematics and statistics to predict
claims on insurance companies and
pension funds. balance sheet The financial statement that
shows an economic unit’s assets, liabilities,
and equity at a given point in time. additional funds needed The additional
external financing required to support asset
growth when forecasted assets exceed
forecasted liabilities and equity.
after-tax cost of debt (AT kd) The aftertax cost to a company of obtaining debt
agency costs Costs incurred to monitor
agents to reduce the conflict of interest
between agents and principals. B banker’s acceptance A security that
represents a promise by a bank to pay a
certain amount of money, if the original
note maker doesn’t pay.
bearer The owner of a security.
best efforts basis An arrangement in
which the investment banking firm tries
its best to sell a firm’s securities for the
desired price, without guarantees. If the
securities must be sold for a lower price,
the issuer collects less money. agent A person who has the implied or
actual authority to act on behalf of another. beta (β) The measure of nondiversifiable
risk. The stock market has a beta of 1.0.
Betas higher than 1.0 indicate more
nondiversifiable risk than the market, and
betas lower than 1.0 indicate less. Riskfree portfolios have betas of 0.0. aggressive working capital financing
approach The use of short-term funds
to finance all temporary current assets,
possibly all or some permanent current
assets, and perhaps some fixed assets. bird-in-the-hand theory A theory
that says that investors value a dollar of
dividends more highly than a dollar of
reinvested earnings because uncertainty is
resolved. American depository receipts
(ADRs) Securities denominated in U.S.
dollars that represent a claim on foreign
currency-denominated stocks held in a
trust. board of directors A group of individuals
elected by the common stockholders to
oversee the management of the firm. agency problem The possibility of
conflict between the interests of a firm’s
managers and those of the firm’s owners. amortized loan A loan that is repaid in
regularly spaced, equal installments, which
cover all interest and principal owed.
annuitant A person who is entitled to
receive annuity payments.
annuity A series of equal cash payments
made at regular time intervals. bond maturity date The date on which
the final payment is promised by the bond
bonds Securities that promise to pay the
bearer a certain amount at a time in the
future and may pay interest at regular
intervals over the life of the security.
book value, net worth The total amount
of common stockholders’ equity on a
company’s balance sheet. G-1 broker A person who brings buyers and
business risk The uncertainty a company
has due to fluctuations in its operating
call premium The premium the issuer
pays to call in a bond before maturity. The
excess of the call price over the face value.
call provision A bond indenture provision
that allows the issuer to pay off a bond
before the stated maturity date at a
capital Funds supplied to a firm.
capital asset pricing model (CAPM)
A financial model that can be used to
calculate the appropriate required payment
of return for an investment project, given
its degree of risk as measured by beta (β).
capital budget A document that shows
planned expenditures for major asset
acquisitions items, such as equipment or
capital budgeting The process of
evaluating proposed projects.
capital gains The profit made when an
asset price is higher than the price paid.
capital market The market where longterm securities are traded.
capital rationing The process whereby
management sets a limit on the amount of
cash available for new capital budgeting
capital structure The mixture of sources
of capital that a firm uses (for example,
debt, preferred stock, and common stock).
cash budget A detailed budget plan that
shows the cash flows expected to occur
during specific time periods.
C corporations Subchapter C
corporations are large corporations that are
taxed separately, via the corporate payment
income tax, from their owners.
chief financial officer The manager
who directs and coordinates the financial
activities of the firm. G-2 Glossary clientele dividend theory The theory
that says that a company should attempt
to determine the dividend wants of its
stockholders and maintain a consistent
policy of paying stockholders what
coefficient of variation The standard
deviation divided by the mean. A measure
of the degree of risk used to compare
alternatives with possible returns of
collateral Assets a borrower agrees to
give to a lender if the borrower defaults on
the terms of a loan.
collection policy The firm’s plans for
getting delinquent credit customers to pay
combined leverage The phenomenon
whereby a change in sales causes net
income to change by a larger percentage
because of fixed operating and
commercial paper A short-term,
unsecured debt instrument issued by a
large corporation or financial institution.
common stock A security that indicates
ownership of a corporation.
compensating balance A specified
amount that a lender requires a borrower to
maintain in a non-interest-paying account
during the life of a loan.
component cost of capital The cost of
raising funds from a particular source, such
as bondholders or common stockholders.
compound interest Interest earned on
interest in addition to interest earned on
the original principal.
conservative working capital financing
approach The use of long-term debt and
equity to finance all long-term fixed assets
and permanent current assets, in addition
to some part of temporary current assets.
continuous compounding A process
whereby interest is earned on interest
every instant of time.
contribution margin Sales price per unit
minus variable cost per unit.
controller The manager who is
responsible for the financial and cost
accounting activities of a firm. conversion ratio The number of shares
(usually of common stock) that the holder
of a convertible bond would receive if he
or she exercised the conversion option.
conversion value The value of the stock
that would be received if the conversion
option on a convertible bond were
convertible bond A bond that may be
converted, at the option of the bond’s
owner, into a certain amount of a different
type of security issued by the company.
corporate bond A security that represents
a promise by the issuing corporation to
make certain payments, according to a
certain schedule, to the owner of the bond.
corporation A business chartered by
the state that is a separate legal entity
having some, but not all, of the rights and
responsibilities of a natural person.
correlation The degree to which one
variable is linearly related to another.
correlation coefficient The measurement
of degree of correlation, represented by the
letter r. Its values range from + 1.0 (perfect
positive correlation) to –1.0 (perfect
cost of debt (kd) The lender’s required
rate of return on a company’s new bonds
or other instrument of indebtedness. credit unions Financial institutions
owned by members who receive interest
on shares purchased and who obtain loans.
cross rate An exchange rate determined
by examining how each of two currencies
is valued in terms of a common third
cross-sectional analysis Comparing
variables for different entities (such as
ratio values for different companies) for
the same point in time or time period.
current assets Liquid assets of an
economic entity (e.g., cash, accounts
receivable, inventory, etc.) usually
converted into cash within one year.
current liabilities Liabilities that are
coming due soon, usually within one year.
date of record The date on which
stockholder records are checked for the
purpose of determining who will receive
the dividend that has been declared.
dealer A person who makes his or her
living buying and selling assets.
debenture A bond that is unsecured.
declaration date The date on which the
board of directors announces a dividend is
to be paid. cost of equity from new common
stock (kn) The cost of external equity,
including the costs incurred to issue new
common stock. default risk premium The extra interest
lenders demand to compensate for
assuming the risk that promised interest
and principal payments may be made late
or not at all. cost of internal equity (ks) The required
rate of return on funds supplied by existing
common stockholders through earnings
retained. deficit economic unit A government,
business, or household unit with
expenditures greater than its income. cost of preferred stock (kp) Investors’
required rate of return on a company’s new
credit policy Credit standards a firm has
established and the credit terms it offers.
credit scoring A process by which
candidates for credit are compared against
indicators of credit worthiness and scored
credit standards Requirements customers
must meet in order to be granted credit. degree of combined leverage (DCL) The
percentage change in net income divided
by the percentage change in sales.
degree of financial leverage (DFL) The
percentage change in net income divided
by the percentage change in operating
degree of operating leverage (DOL) The
percentage change in operating income
divided by the percentage change in sales. Glossary
depreciation basis The total value of an
asset upon which depreciation expense will
be calculated, a part at a time, over the life
of the asset.
discounted cash flow (DCF) model
A model that estimates the value of an asset
by calculating the sum of the present values
of all future cash flows.
discount loan A loan with terms that call
for the loan interest to be deducted from
the loan proceeds at the time the loan is
discount rate The interest rate used when
calculating a present value representing the
required rate of return.
discount yield The return realized by an
investor who purchases a security for less
than face value and redeems it at maturity
for face value.
diversification effect The effect of
combining assets in a portfolio such that
the fluctuations of the assets’ returns tend
to offset each other, reducing the overall
volatility (risk) of the portfolio.
dividend reinvestment plan An
arrangement offered by some corporations
where cash dividends are held by the
company and used to purchase additional
shares of stock for the investor.
dividend yield A stock’s annual dividend
divided by its current market price.
dividends Payments made to stockholders
at the discretion of the board of directors of
dividends payable The liability item on a
firm’s balance sheet that reflects the amount
of dividends declared but not yet paid.
economic value added (EVA) The amount
of profit remaining after accounting for the
return expected by the firm’s investors.
effective interest rate The annual interest
rate that reflects the dollar interest paid
divided by the dollar obtained for use.
electronic funds transfers The act of
crediting one account and simultaneously
debiting another by a computer.
equity multiplier The total assets to total
common stockholders’ equity ratio. G-3 euro The common currency used by the
European Monetary Union countries. percentage because of the presence of fixed
financial costs. excess financing The amount of excess
funding available for expected asset growth
when forecasted liabilities and equity
exceed forecasted assets. financial markets Exchanges or over-thecounter mechanisms where securities are
traded. exchange rate The number of units of
one country’s currency that is needed to
purchase one unit of another country’s
ex-dividend A characteristic of common
stock such that it is trading without
entitlement to an upcoming dividend.
ex-rights A characteristic of common
stock such that it is trading without the
entitlement to an upcoming rights offering.
externalities Positive or negative effects
that will occur to existing projects if a new
capital budgeting project is accepted.
face value, or par value, or principal The
amount the bond issuer promises to pay to
the investor when the bond matures. The
terms face value, par value, and principal
are often used interchangeably. financial ratio A number that expresses
the value of one financial variable relative
to the value of another.
financial risk The additional volatility of a
firm’s net income caused by the presence of
fixed financial costs.
financing cash flows Cash flows that
occur as creditors are paid interest and
principal, and stockholders are paid
first mortgage A mortgage bond (a bond
secured by real property) that gives the
holder first claim on the real property
pledged as security if there is a foreclosure.
fixed assets Assets that would not
normally be sold or otherwise disposed of
for a long period of time.
fixed costs Costs that do not vary with the
level of production. factoring The practice of selling accounts
receivable to another firm. flotation costs Fees that companies pay
(to investment bankers and to others) when
new securities are issued. factors Firms that buy and administer
another firm’s accounts receivable. forward rate The exchange rate for future
delivery. Federal Reserve System The
government-sponsored entity that acts as
the central bank of the United States and
that examines and regulates banks and
other financial institutions. future value The value money or another
asset will have in the future. fiduciary responsibility The legal
requirement that those who are managing
assets owned by someone else do so in a
prudent manner and in accordance with the
interests of the person(s) they represent.
financial intermediaries Institutions
that facilitate the exchange of cash and
financial (capital) lease A lease that is
generally long term and non-cancelable,
with the lessee using up most of the
economic value of the asset by the end of
the lease’s term.
financial leverage The phenomenon
whereby a change in operating income
causes net income to change by a larger future value interest factor for an
annuity (FVIFA) The factor, which when
multiplied by an expected annuity, gives
you the sum of the future values of the
annuity stream: future value interest factor for a single
amount (FVIF) The (1 + k)n factor that is
multiplied by the original value to solve for
going concern value That value that
comes from the future earnings and cash
flows that can be generated by a company
if it continues to operate. G-4 Glossary H
hedge A financial arrangement used to
offset or protect against negative effects
of something else, such as fluctuating
hurdle rate The minimum rate of
return that management demands from a
proposed project before that project will be
income statement A financial statement
that presents the revenues, expenses, and
income of a business over a specific time
incremental cash flows Cash flows
that will occur only if an investment is
incremental depreciation expense The
change in depreciation expense that a
company will incur if a proposed capital
budgeting project is accepted.
indenture The contract between the
issuing corporation and the bond’s
independent projects A group of projects
such that any or all could be accepted.
industry comparison The process
whereby financial ratios of a firm are
compared to those of similar firms to see if
the firm under scrutiny compares favorably
or unfavorably with the norm.
inflation premium The extra interest
that compensates lenders for the expected
erosion of purchasing power of funds due
to inflation over the life of the loan.
initial public offering (IPO) The process
whereby a private corporation issues new
common stock to the general public, thus
becoming a publicly traded corporation.
institutional investors Financial
institutions that invest in the securities of
interest The compensation lenders
demand and borrowers pay when money
is lent. interest rate parity A theory that states
that the difference between the exchange
rate specified for future delivery and that
for current delivery equals the difference
in the interest rates for securities of the
interest rate spread The rate a bank
charges for loans minus the rate it pays for
intermediation The process by which
funds are channeled from surplus to
deficit economic units through a financial
internal rate of return (IRR) The
estimated rate of return for a proposed
project, given the size of the project’s
incremental cash flows and their timing.
international bonds Bonds that are sold
in countries other than where the issuer is
international Fisher effect A theory
developed by economist Irving Fisher
that claims that changes in interest rates
for two countries will be offset by equal
changes, in the opposite direction, in the
inventory financing A type of financing
that uses inventory as loan collateral.
investment banking firm A firm that
helps issuers sell their securities and that
provides other financial services.
investment-grade bonds Bonds rated
Baa3 or above by Moody’s bond rating
agency and BBB- or above by Standard &
JIT An inventory system in which
inventory items are scheduled to be
delivered “just in time” to be used as
junk bonds Bonds with lower than
lease A contract between an asset owner
(lessor) and another party who uses
that asset (lessee) that allows the use of
the asset for a specified period of time,
specifies payment terms, and does not
convey legal ownership. lessee The party in a lease contract who
uses the asset.
lessor The party in a lease contract who
owns the asset.
leverage Something that creates a
magnifying effect, such as when fixed
operating or fixed financial costs cause a
magnifying effect on the movements of
operating income or net income.
leverage effect The result of one factor
causing another factor to be magnified,
such as when debt magnifies the return
stockholders earn on their invested funds
over the return on assets.
liability insurance Insurance that pays
obligations that may be incurred by the
insured as a result of negligence, slander,
malpractice, and similar actions.
limited liability companies (LLCs)
Hybrids between partnerships and
corporations that are taxed like the former
and have limited liability for the owners
like the latter.
limited liability partnership (LLPs)
Business entities that are usually formed
by professionals such as doctors, lawyers,
or accountants and that provide limited
liability for the partners.
limited partnerships (LPs) Partnerships
that include at least one partner whose
liability is limited to the amount invested.
They usually take a less active role in the
running of the business than do general
line of credit An informal arrangement
between a lender and borrower wherein
the lender sets a limit on the maximum
amount of funds the borrower may use at
any one time.
liquidation value The amount that would
be received by the owners of a company
that sold all its assets as market value, paid
all its liabilities and preferred stock, and
distributed what was left to the owners of
liquidity risk premium The extra interest
lenders demand to compensate for holding
a security that is not easy to sell at its fair
lockbox A way station (typically a post
office box) at which customers may send
payments to a firm. Glossary
MACRs, modified accelerated cost
recovery system The depreciation rules
established by the Tax Reform Act of
1986 that allow owners to take accelerated
depreciation with greater deductions in
earlier years than in later years.
managing investment banker The head
of an investment banking underwriting
syndicate. Modigliani and Miller dividend
theory A theory developed by financial
theorists Franco Modigliani and Merton
Miller that says the amount of dividends
paid by a firm does not affect the firm’s
money market The market where shortterm securities are traded.
mortgage bond A bond secured by real
property. marginal cost of capital (MCC) The
weighted average cost of capital for the
next dollar of funds raised. multinational corporation (MNC) A
corporation that has operations in more
than one country. marginal tax rate The tax rate applied to
the next dollar of taxable income. municipal bonds Bonds issued by a
state, city, county, or other nonfederal
government authority, including specially
created municipal authorities such as a toll
road or industrial development authority. market efficiency The relative ease,
speed, and cost of trading securities. In an
efficient market, securities can be traded
easily, quickly, and at low cost. In an
inefficient market, one or more of these
qualities is missing.
market risk premium The additional
return above the risk-free rate demanded
by investors for assuming the risk of
investing in the market.
market value added (MVA) The market
value of the firm, debt plus equity, minus
the total amount of capital invested in the
maturity date The date the bearer of a
security is to be paid the principal, or face
value, of a security.
maturity risk premium The extra (or
sometimes lesser) interest that lenders
demand on longer-term securities.
mixed ratio A financial ratio that includes
variables from both the income statement
and the balance sheet.
moderate working capital financing
approach An approach in which a firm
finances temporary current assets with
short-term funds and permanent current
assets and fixed assets with long-term
Modified Internal Rate of Return
(MIRR) The estimated rate of return for
a proposed project for which the projected
cash flows are assumed to be reinvested at
the cost of capital rate. mutually exclusive projects A group of
projects that compete against each other;
only one of the mutually exclusive projects
may be chosen.
mutuals Institutions (e.g., savings and
loans or insurance companies) that are
owned by their depositors or policy
holders. G-5 nonsimple project A project that has a
negative initial cash flow and also has one
or more negative future cash flows.
NPV profile A graph that displays how a
project’s net present value changes as the
discount rate, or required rate of return,
open-market operations The buying
and selling of U.S. Treasury securities
or foreign currencies to achieve some
operating lease A lease that has a term
substantially shorter than the useful life of
the asset and is usually cancelable by the
operating leverage The effect of fixed
operating costs on operating income;
because of fixed costs, any change in sales
results in a larger percentage change in
opportunity cost The cost of forgoing
the best alternative to make a competing
choice. N optimal capital budget The list of all
accepted projects and the total amount of
their initial cash outlays. negotiable CDs A deposit security issued
by financial institutions that comes in
minimum denominations of $100,000 and
can be traded in the money market. over-the-counter market A network of
dealers around the world who purchase
securities and maintain inventories of
securities for sale. net present value (NPV) The estimated
change in the value of the firm that would
occur if a project is accepted.
net working capital The amount of
current assets minus the amount of current
liabilities of an economic unit. P
par value The stated value of a share of
partnership An unincorporated business
owned by two or more people. nominal interest rate The rate observed
in the financial marketplace that includes
the real rate of interest and various
premiums. payback period The expected amount
of time a capital budgeting project will
take to generate cash flows that cover the
project’s initial cash outlay. nominal risk-free rate of interest The
interest rate without any premiums for the
uncertainties associated with lending. payment date The date the transfer agent
sends out a company’s dividend checks. nondiversifiable risk The portion of
a portfolio’s total risk that cannot be
eliminated by diversifying. Factors shared
to a greater or lesser degree by most assets
in the market, such as inflation and interest
rate risk, cause nondiversifiable risk. pension fund A financial institution that
takes in funds for workers, invests those
funds, and then provides for a retirement
permanent current assets The minimum
level of current assets maintained. G-6 Glossary perpetuity An annuity that has an infinite
portfolio A collection of assets that are
managed as a group.
preemptive right A security given by
some corporations to existing stockholders
that gives them the right to buy new shares
of common stock at a below-market price
until a specified expiration date.
present value Today’s value of promised
or expected future value.
present value interest factor for an
annuity (PVIFA) The factor which,
when multiplied by an expected annuity
payment, gives you the present value of
the annuity stream: prospectus A disclosure document given
to a potential investor when a new security
publicly traded corporations
Corporations that have common stock
that can be bought in the marketplace by
any interested party and that must release
audited financial statements to the public.
pure time value of money The value
demanded by an investor to compensate
for the postponement of consumption.
putable bonds Bonds that can be
redeemed before the scheduled maturity
date, at the option of the bondholder.
quota A quantity limit imposed by one
country on the amount of a given good that
can be imported from another country. risk The potential for unexpected events to
risk-adjusted discount rate (RADR)
A required rate of return adjusted to
compensate for the effect a project has on a
risk aversion A tendency to avoid risk
that explains why most investors require a
higher expected rate of return the more risk
risk-free rate of return The rate of return
that investors demand in order to take on a
project that contains no risk other than an
risk-return relationship The positive
relationship between the risk of an
investment and an investor’s required rate
present value interest factor for a single
amount (PVIF) The 1/( 1 + k)n factor that
is multiplied by a given future value to
solve for the present value.
primary market The market in which
newly issued securities are sold to the
primary reserves Vault cash and deposits
at the Fed that go toward meeting a bank’s
principal A person who authorizes an
agent to act for him or her.
private corporation A corporation that
does not offer its shares to the general
public and that can keep its financial
pro forma financial statements Projected
progressive tax rate structure A tax
structure under which the tax rate increases
as taxable income increases, usually in a
pattern of several steps. real option A valuable characteristic
of some projects where revisions to that
project at a later date are possible.
real rate of interest The rate that the
market offers to lenders to compensate for
refunding Issuing new bonds to replace
relative purchasing power parity
theory A theory that states that as
prices change in one country relative
to those prices in another country, for a
given traded basket of similar goods and
services, the exchange rate will tend to
change proportionately but in the opposite
required reserve ratio The percentage
of deposits that determines the amount of
reserves a financial institution is required
residual income Income left over, and
available to common stockholders, after all
other claimants have been paid. promissory note A legal document the
borrower signs indicating agreement to the
terms of a loan. restrictive covenants Promises made by
the issuer of a bond to the investor, to the
benefit of the investor. proprietorship A business that is not
incorporated and is owned by one person. rights-on A characteristic of common
stock such that it is trading with the
entitlement to an upcoming right. sales breakeven point The level of sales
that must be achieved such that operating
income equals zero.
savings and loan associations (S&Ls)
Financial institutions that take in deposits
and make loans (primarily mortgage loans).
second mortgage A mortgage bond (a
bond secured by real property) that gives the
holder second claim (after the first-mortgage
bond-holder) on the real property pledged
secondary market The market in which
previously issued securities are traded from
one investor to another.
secondary reserves Marketable securities
that can be readily sold to obtain cash.
secured bond A bond backed by specific
assets that the investor may claim if there is
security A document that establishes the
bearer’s claim to receive funds in the future.
self-liquidating loan A loan that is used to
acquire assets that generate enough cash to
pay off the loan.
senior debenture An unsecured bond
having a superior claim on the earnings and
assets of the issuing firm relative to other
serial payments A mode of payment in
which the issuer pays off bonds according
to a staggered maturity schedule.
short-term financing decisions Financial
decisions relating to raising funds for a
short period of time from sources such as
bank loans, trade credit, and commercial
signaling The message sent by managers,
or inferred by investors, when a financial
decision is made.
signaling dividend theory A theory that
says that dividend payments often send a
signal from the management of a firm to
simple project A project that has a
negative initial cash flow, followed by
positive cash flows only.
sinking fund A method for retiring
bonds. The bond issuer makes regular
contributions to a fund that the trustee
uses to buy back outstanding bonds and
spot rate The exchange rate for current
stakeholder A party having an interest
in a firm (for example, owners, workers,
management, creditors, suppliers,
customers, and the community as a whole).
standard deviation A statistic that
indicates how widely dispersed actual
or possible values are distributed around
stated interest rate The interest rate
advertised by the lender. Depending on
the terms of the loan, the stated rate may
or may not be the same as the effective
statement of retained earnings
A financial statement that shows how the
value of retained earnings changes from
one point in time to another.
stock Certificates of ownership interest in
stock dividend A firm sends out new
shares of stock to existing stockholders
and makes an accounting transfer from
retained earnings to the common stock
and capital in excess of par accounts of the
balance sheet. stock split A firm gives new shares of
stock to existing shareholders; on the
balance sheet, they decrease the par value
of the common stock proportionately
to the increase in the number of shares
straight bond value The value a
convertible bond would have if it did not
offer the conversion option to the investor.
straight-line depreciation A depreciation
rule that allows equal amounts of the
cost of an asset to be allocated over the
strengthening currency A currency that
is now convertible into a larger number of
units of another currency than previously.
Subchapter S corporation A small
corporation whose income is taxed like a
subordinated debenture An unsecured
bond having an inferior claim on the
earnings and assets of the issuing firm
relative to other debentures.
sunk cost A cost that must be borne
whether a proposed capital budgeting
project is accepted or rejected.
surplus economic unit A business,
household, or government unit with
income greater than its expenditures.
syndicate A temporary alliance of
investment banking firms that is formed
for the purpose of underwriting a new
target stock A class of common stock that
represents a claim on a part of company.
tariff A tax imposed by one country on
imports from another country.
temporary current assets The portion
of current assets that fluctuates during the
company’s business cycle.
10-K reports An audited set of financial
statements submitted annually by all
public corporations to the Securities and
Exchange Commission (SEC).
10-Q reports An unaudited set of
financial statements submitted quarterly
by all public corporations to the Securities
and Exchange Commission (SEC). G-7 terminal value The predicted value of
a company’s projected free cash flows at
a specified future point in time from that
point in time to perpetuity.
time value of money The phenomenon
whereby money is valued more highly the
sooner it is received.
trade credit Funds obtained by delaying
payment to suppliers.
transaction cost The cost of making a
transaction, usually the cost associated
with purchasing or selling a security.
transfer agent A party, usually a
commercial bank, that keeps track of
changes in stock ownership, collects cash
from a company, and pays dividends to its
treasurer The manager responsible for
financial planning, fund-raising, and
allocation of money in a business.
Treasury bills Securities issued by
the federal government in minimum
denominations of $1,000 in maturities of
three, six, or twelve months.
Treasury bonds and notes Securities
issued by the federal government that
make semiannual coupon interest
payments and pay the face value at
maturity. Treasury notes come in maturities
of one to ten years. Treasury bonds come
in maturities of more than ten years.
trend analysis An analysis in which
something (such as a financial ratio)
is examined over time to discern any
trustee The party that oversees a bond
issue and makes sure all the provisions set
forth in the indenture are carried out.
uncertainty The chance, or probability,
that outcomes other than what is expected
underwriting The process by which
investment banking firms purchase a new
security issue in its entirety and resell it
to investors. The risk of the new issue is
transferred from the issuing company to
the investment bankers. G-8 Glossary V
variable costs Costs that vary with the
level of production.
variable-rate bonds Bonds that have
periodic changes in their coupon rates,
usually tied to changes in market interest
warrant A security that gives the holder
the option to buy a certain number of
shares of common stock of the issuing
company, at a certain price, for a specified
period of time. weakening currency A currency that is
now convertible into a smaller number of
units of another currency than previously.
wealth Assets minus liabilities.
weighted average cost of capital (ka)
or (WACC) The average of all the
component costs of capital, weighted
according to the percentage of each
component in the firm’s optimal capital
working capital Another name for the
current assets on a firm’s balance sheet. Y
yield to maturity (YTM) The investor’s
return on a bond, assuming that all
promised interest and principal payments
are made on time and the interest payments
are reinvested at the YTM rate.
zero-coupon bonds Bonds that pay face
value at maturity and that pay no coupon
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- Spring '10