Sole Proprietorship
A business form for which there is one owner. This single owner has unlimited liability for all debt of the firm.
Partnership
A business form in which two or more individuals act as owners. In a general partnership all partners have unlimited liability for the debts of the firm; in a limited partnership one or more partners may have limited liability.
Corporation
A business form legally separate from its owners. Its distinguishing features include limited liability, easy transfer of ownership, unlimited life, and an ability to raise large sums of capital
Limited Liability Companies
A business form that provides its owners (called "members") with corporate-style limited personal liability and the federal-tax treatment of a partnership.
Depreciation
They systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both.
Depreciation Basis
In tax accounting, the fully installed cost of an asset. This is the amount that, by law, may be written off over time for tax purposes.
Straight-Line Depreciation
A method of depreciation that allocates expenses evenly over the depreciable life of the asset.
Modified Accelerated Cost Recovery System (MACRS)
The new accelerated cost recovery system, created after the release of the Tax Reform Act of 1986, which allows for greater accelerated depreciation over longer time periods.
Financial Markets
All institutions and procedures for bringing buyers and sellers of financial instruments together.
Money Market
The market for short-term (less than one year original maturity) government and corporate debt securities. It also includes government securities originally issued with maturities of more than one year but that now have a year or less until maturity.
Capital Market
The market for relatively long-term (greater than one year original maturity) financial instruments (e.g., bonds and stocks).
Primary Market
A market where new securities are bought and sold for the first time (a "new issues" market).
Secondary Market
A market for existing (used) securities rather than new issues.
Financial Intermediaries
Financial institutions that accept money from savers and use those funds to make loans and other financial investments in their own name. They include commercial banks, savings institutions, insurance companies, pension funds, finance companies, and mutua
Investment Bankers
A financial institution that underwrites (purchases at a fixed price on a fixed date) new securities for resale.
Default Risk
The failure to meet the terms of a contract, such as failure to make interest or principal payments due on a loan.
Investment Grade
Credit ratings 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality).
Speculative Grade
Credit ratings 'BB', 'B', 'CCC', etc. are considered low credit quality, and are commonly referred to as "junk bonds".
Marketability
The ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession.
Yield Curve
A graph of the relationship between yields and term to maturity for particular securities.
Nominal Interest rate
A rate of interest quoted for a year that has not been adjusted for frequency of compounding. If interest is compounded more than once a year, the effective interest rate will be higher than the nominal rate. Calculated as = Real Interest Rate + Inflation
Real Interest Rate
An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. Calculated as = Nominal Interest Rate - Inflation (Expected or Actual).
Liquidation Value
The amount of money that could be realized if an asset or a group of assets (e.g., a firm) is sold separately from its operating organization.
Going-Concern Value
The amount a firm could be sold for as a continuing operating business.
Book Value
(1) An asset: the accounting value of an asset - the asset's cost minus its accumulated depreciation; (2) a firm: total assets minus liabilities and preferred stock as listed on the balance sheet.
Market Value
The market price at which an asset trades.
Intrinsic Value
The price a security "ought to have" based on all factors bearing on valuation.
Bond
A long-term debt instrument issued by a corporation or government.
Par Value
The face value of a stock or bond.
Coupon Interest Rate
The stated rate of interest on a bond; the annual interest payment divided by the bond's face value.
Discount Rate (Capitalization Rate)
Interest rate used to convert future values to present values.
Perpetual Bond
No maturity date, non redeemable, but pay a steady stream of interest forever.
Interest Rate Risk
The variability in the market price of a security caused by changes in interest rates.
Discount Bonds
Issued for less than its par (or face) value.
Premium Bonds
Trading above par value, offers coupon rate higher than prevailing interest rates.
Maturity Risk
Associated with uncertainty of interest rates.
Zero-Coupon Bonds
A bond that pays no interest but sells at a deep discount from its face value; it provides compensation to investors in the form of price appreciation.
Yield-to-Maturity
The expected rate of return on a bond if bought at its current market price and held to maturity.
Expected Return
The weighted average of possible returns, with the weights being the probabilities of occurrence.
Risk Averse
Term applied to an investor who demands a higher expected return, the higher the risk.
Actual Return
The actual gain or loss of an investor. Calculated as = Expected Return (ex-ante) plus the effect of firm-specific and economy-wide news.
Diversification
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any
Systematic Risk (Non-diversifiable Risk/Market Risk)
The variability of return on stocks or portfolios associated with changes in return on the market as a whole.
Unsystematic Risk (Diversifiable Risk)
The variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.
Capital-Asset Pricing Model (CAPM)
A model that describes the relationship between risk and expected (required) return; in this model, a security's expected (required) return is the risk-free rate plus a premium based on the systematic risk of the security.
Security Market Line (SML)
A line that describes the linear relationship between expected rates of return for individual securities (and portfolios) and systematic risk, as measured by beta.
Beta
An index of systematic risk. It measures the sensitivity of a stock's returns to changes in returns on the market portfolio. The beta of a portfolio is simply a weighted average of the individual stock betas in the portfolios.
Aggressive Investments
A method of portfolio management and asset allocation that attempts to grow an investment at an above-average rate compared to its industry, but usually take an additional risk.
Defensive Investments
A conservative method of portfolio allocation and management aimed at minimizing the risk of losing principal.
Risk Premium
The return in excess of the risk-free rate of return that an investment is expected to yield. This is a form of compensation for investors who tolerate the extra risk - compared to that of a risk risk-free asset - in a given investment.
Market Risk Premium
The difference between the expected return on a market portfolio and the risk-free rate. Equal to the slope of the security market line, a capital asset pricing model.
Capital Budgeting
The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year.
Operating Cash Flows
A measure of the amount of cash generated by a company's normal business operations.
Financing Cash Flows
A form of financing in which the loan is backed by a company's expected cash flows.
Depreciation
The systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both.
Sunk Costs
Uncoverable past outlays that, because they cannot be recovered, should not affect present actions or future decisions.
Opportunity Costs
What is lost by not taking the next best investment alternative
NWC
Net Working Capital
Capitalized Expenditures
Expenditures that may provide benefits into the future and therefore are treated as capital outlays and not as expenses of the period in which they were incurred.
Initial Cash Flow
The amount of money paid out or received at the start of a project or investment. This is generally a negative amount because project often require a large initial capital investment by a company that will generate positive cash flow over time.
Terminal Cash Flow
The last stage of a project's cash flows.